pmi’s monthly analysis of economic, housing, and mortgage market conditions

8/14/2019 Pmis Monthly Analysis of Economic, Housing, And Mortgage Market Conditions

1/14

PMIS MONTHLY ANALYSIS OF ECONOMIC,

HOUSING, AND MORTGAGE MARKET CONDITIONS

Inside this Issue

The Outlook Special Topic: When

Will the Fed Start toTighten?

Housing MarketIndicators

Mortgage MarketIndicators

Regional Roundup Region in Focus:

The Midwest

The PMI Forecast

SSUE 11 VOLUME 2 Dec 2009

098765432

12

10

8

6

4

40 0

20 0

0

-200

-400

-600

-800

Change in Payroll Employment

(Right Axis)

Percent

Thousands

Civilian Unemployment Rate

(Left Axis)

The OutlookReal GDP growth was revised downward a bit to 2.8 percent for the third quarter (about where

we projected it two months ago). Beyond this, however, most of the economic news was

supportive of faster growth going forward. The job market in particular, while still declining,

appears poised to start growing again soon. Ultimately, it will be job growth that will allow the

recovery to unfold without government assistance, and to allow households to increase both

savings and spending necessary ingredients for a sustained and healthy economic expansion.

Additionally, it appears as if the large inventory cuts by businesses may be done which suggests

that production will rise further in coming months. Finally, consumer spending continues to

trend upward despite tepid confidence and ongoing (if slower) job losses. The odds of an

additional downturn in the economy have fallen substantially over the past couple of months.

(Continued on page 2)

Special Topic: When Will the Fed Start to Tighten?Although there are still some analysts who expect economic growth to stall or even reverse over the

coming year, the consensus forecast is for a moderate pace of growth in 2010. If this is correct, and we

think it is, then the recession has ended and the unprecedented amount of liquidity that the Federal Reserve

has added to the economy in order to spur an expansion wont be needed. In fact, the longer the Fed keeps

the surge in liquidity in place in the face of an expanding economy, the greater the chance that rising

inflation and asset bubbles will result. As a result, it is certain that the Fed will begin to remove this

liquidity through a combination of allowing special facilities to run down and raising the federal funds rate.

But when will the Fed begin to tighten monetary policy?

Source: Bureau of Labor Statistics/Haver Analytics

Figure 1: Job Losses Have Nearly Stopped,

but Unemployment is Still High


Contributors

David W. Berson.Ph.D., Chief Economist

and Strategist

Brett G. Soares,Economic Analyst

Marguerite Nicholson,Executive Assistant II


2/14

Nonfarm payroll employment fell by only 11,000 inNovember, the smallest decline since the recession began in

December 2007 (see figure 1, on cover). The details of thereport were almost all positive:

The unemployment rate fell to 10.0 percent(although it is likely to head higher again).

Average hours worked (a leading indicator of thedirection of hiring) rose to the highest level since

February, and especially surged in themanufacturing sector.

Average hourly earnings increased, but only by aminiscule 0.1 percent.

The previous two months of payroll employmentdeclines were revised upward by a net 159,000.

Initial state unemployment claims data support the good newsfrom Decembers employment report. The four-week averageof claims dropped to 474,000 in early-December, the lowest

level since September 2008. Moreover, the trend is clearlysharply downward, and claims should fall to around 400,000 inthe first quarter. This is a level that historically has supportedpositive nonfarm payroll employment, although the correlation

between initial claims and payroll employment isnt perfect.

Industrial activity continues to expand rapidly. Although themanufacturing survey index from the Institute for SupplyManagement (ISM) slipped to 53.6 in November, it is still

well-above the 50 level that indicates an expandingmanufacturing sector, and much higher than the 43 reading thatdenotes an expanding economy. Moreover, the new orders

component of the ISM manufacturing index rose to 60.3 suggesting future growth in production.

Consumers are also doing their part to help the expansion.Retail sales jumped by 1.3 percent in November, the third

month out of four with strong gains pushing sales above theiryear-ago levels for the first time in 15 months. Auto salescontinue to edge upward even without the explicit governmentsupport of the cash-for-clunkers program, climbing to nearly

an 11 million unit annualized pace of sales in November.Perhaps most importantly, core retail sales (excluding autos,gasoline, and building supplies) has increased for fourconsecutive months. Finally, according to recent data from theFederal Reserve, household net worth and the value of owner-

occupied real estate both rose again in the third quarter helping to support consumer spending.

Despite the downward revision to third quarter growth,

the data already in-hand for the fourth quarter suggest a

pickup in the pace of activity. As a result, we have

increased our projection for 2009Q4 real GDP growth to

3.5-4.0 percent which would give the economy two

consecutive quarters of at-or-above trend economic

growth. We expect the pace of growth to moderate a bit

next year as fiscal and monetary policy stimulus begin towane, but we still project growth of 2.5-3.0 percent. By

2011, the economy should finally grow at an above-trend

pace for a more extended period, although still by less than

in a typical economic expansion. The job market is finally

poised to end its long decline, and we expect nonfarm

payroll employment to finally turn positive before the end

of the first quarter. Since unemployment rates tend to lag,

we dont expect them to peak until around mid-year, but it

should start to edge down over the second half of the year.

In the absence of a strong economic recovery, however, the

decline in unemployment is likely to be fairly slow.

Housing: Housing activity was mixed in October, with salesup and new construction down. New home sales resumed their

upward trend, climbing by 6.2 percent to 430,000 units(seasonally adjusted annual rate, or SAAR). Some of this

The Outlook (continued from cover page)increase may have come from buyers wanting to advantage of the then-expiring first-time homebuyers

credit. In order to take advantage of this credit, the purneeded to be completed by the end of November henc

pickup in sales in advance of that date. This was very behind much of the surge in existing sales in the same peTotal existing home sales (single-family plus condominiskyrocketed by 10.1 percent to 6.10 million units (SAAR)

highest level since early 2007 and the biggest percentage

ever. Since total home sales have only been tracked separby the National Association of Realtors (NAR) since 19better historical comparison is made with existing single-fa

homes and Octobers surge was the largest since early-We expect some falloff in the November figures in responthe pulling-ahead of sales because of the tax credit. housing starts dropped by 10.6 percent in October to 529

units (SAAR) the lowest level since April. Both singlemultifamily starts contributed to this decline, falling by 6.34.6 percent respectively. Octobers level of multifamily 53,000 units (SAAR), was an all-time low by a signif

margin.

Leading indicators of home sales were also mixed over the

month. NARs pending home sales index rose for an

consecutive month in October, and are at the highest level early 2006 but this might have been picking up the rubuyers trying to take advantage of the tax credit. The Na

Association of Homebuilders (NAHB) housing market was unchanged at 17 in October. While this is well abovaverage for the first half of the year, it is still a very low f

historically. Finally, purchase activity in the Mortgage BaAssociations (MBA) weekly applications survey droppthe lowest level since 1997 in November. This sharp droplikely the result of the tax credit, as purchase applications

in the second half of the month, after the new creditenacted into law, and increased still more in early Decemb

Most of the repeat-transaction home price indices (HPIs)again in the most recent month. The seasonally adjuste

city S&P/Case-Shiller HPI rose for a fourth consecutive min September, up by 0.3 percent although it is still dow

9.4 percent from a year earlier (the smallest year-ago shosince the end of 2007). The geographically broader natindex rose again in the third quarter, up by 1.9 percent down by 8.95 percent from a year earlier. The Fe

Housing Finance Agencys (FHFA) purchase-only increased for the sixth time in nine months in September, u0.03 percent but down by only 3.0 percent from a earlier. Finally, the non-seasonally adjusted First AmeCoreLogic Loan Performance HPI (LP HPI), the broade

all of these measures, fell in September for the first time imonths down by 0.4 percent for the month and bypercent from a year-earlier. As with the Case-Shiller i

this is the smallest 12-month decline since the end of 2007

We continue to project modest increases in home sales

the course of this year and next in response to high lev

affordability, investors and first-time buyers ta

advantage of distressed sales, improving demographi

pickup in the economy, and the renewal and mo

expansion of the first-time homebuyer tax credit. T

may be a temporary decline in sales after the new

credit ends in April, however, as some sales that norm

would have occurred later in the year are pulled forw

in order to take advantage of the tax credit. For 2009

project existing home sales to rise by 3.7 percent (an

by more than 21 percent on a fourth-quarter-to-fo

quarter basis, reflecting improving sales over the co

of the year and especially the tax-induced jum

October). (Continued on pg 3)Page 2


3/14

The Outlook (continued from page 2)New home sales, which have to compete withforeclosures, are projected to decline by 19.4 percent in2009 (but to rise by 12.5 percent measured fourth-quarter-to-fourth-quarter). Sales should rise morestrongly in 2010, as the job market finally starts toimprove and credit markets function better withexisting sales climbing by 8.8 percent and new sales up by29.2 percent. The continued oversupply of homes on themarket still weighs on house prices, although the pickup

in sales has tempered this. We project median existinghome prices to fall by 12.6 percent in 2009. While thereare likely to be some seasonal declines in the wintermonths, with prices falling by more than 5.0 percent bythe spring, stronger sales and reduced inventory shouldallow prices to be about unchanged over the course of2010.

Interest Rates and Financial Markets: Financial marketsmostly shrugged-off the problems of Dubai World in

November. A year ago, this probably would have been asignificant event causing risk spreads to spike, equitymarkets to drop, and the dollar to soar. Instead, risk spreadswere basically unaffected, broad stock market measures

continue to edge upward, and the dollars downtrend was

extended. While there are a number of reasons for thenegligible impact of the problems with Dubai World infinancial markets, one of the most important is that financial

markets are much healthier today than they were a year ago.

We continue to expect the Fed to remain on the sidelines

until after the unemployment rate has peaked, especially ifoverall economic growth cools some in the first half of 2010as we project. Given our late-second quarter estimate for the

peak in unemployment, this suggests the Fed will begin totighten sometime in the second half of the year. The mostlikely timing is the fourth quarter, but a quarter earlier or laterwouldnt be a surprise (especially the latter). Long-term

interest rates should start to move up in advance of the Fedstightening, resulting in some additional steepening of the

yield curve. In 2011, however, with Fed tightening in fullswing, we expect short-term rates to move up significantly

more than long-term rates resulting in a flattening of theyield curve over the course of that year.

We expect little change in interest rates in the briefperiod between now and the end of 2009. By the end of2010, however, long-term interest rates should be higherthan current levels. We project yields on 10-yearTreasury notes, for example, to rise by about 75 basispoints and to end 2010 a bit over 4.00 percent. Continued

hoped to lower mortgage rates, boost home sales, and home prices from collapsing. One of the ways to determin

degree of success of this program is to compare yields oyear fixed-rate mortgages (FRMs) with those of 10

Treasury notes (see figure 2). The spread between these thighly volatile, depending upon prepayment expectarelative supply and demand conditions, and a number of factors. Late in 2008, the spread climbed to an all-time

mostly in response to a flight-to-safety surge in deman

Treasury securities but also in response to investor conabout the safety of GSE debt and securities (part of the gefinancial panic of the time). The Feds actions initially ha

desired response, as the spread fell to 1.32 percentage poithe lowest in more than 10 years. Spreads then movemodestly in the summer, but lately have dropped nearly tlate-spring lows.

Our expectation is that mortgage rates will climb by 2basis points as the Fed ends its support. It is likely tha

increase will be toward the upper end of that range initiallthe market adjusts to having to provide all of the demanGSE debt and securities. Eventually, however, we thinkthe increase will move down to the lower end of this ran

market participants recognize the safety of these instrum

and they attempt to diversify out of Treasury securitiesother safe fixed-income investments with higher yields. yields on 30-year FRMs around 4.80 percent today,

suggests an initial rise to around 5.30 percent before slippiaround 5.00 percent. We expect longer-term interest ratrend upward over the course of the year, however, so

relative move in mortgage rates is projected to occur generalized upward rate environment which suggests thactual rise of mortgage rates will be somewhat more than t

Based on all of these factors, we project a rise in 30-FRM rates to around 5.75 percent by the end of 2010. is likely to involve two discrete periods of increases: eathe second quarter when the Feds purchase progends, and in the fourth quarter when market expecta

of Fed tightening increase. We continue to projdecline of about 14 percent in total mortgage originanext year to $1.73 trillion (after a rise of more thapercent this year stemming from a jump in refinanciPurchase originations, however, should climb bypercent in 2010 to $865 billion as home sales continurise and home price declines finally end. Refinance acis expected to drop over the course of next yeamortgage rates rise falling by about one-third to billion (bringing the refi share down to 50 percent).

Page 3

0505

3. 0

2. 5

2. 0

1. 5

1. 0

low inflation, and inflation expectations shouldhelp to temper the rise in long-term rates over thenext few years. Short-term rates will be held inplace by unchanged Fed monetary policy, so we

expect no significant changes in short-term ratesuntil the Fed begins to tighten. With only modesttightening expected for next year, short-termrates are expected to increase by somewhat lessthan long-term rates.

Figure 2: Mortgage Spreads have Dropped

Mortgage Markets: One of the most importantunknowns with regard to the mortgage market in2010 is what impact the end of the Feds purchases

of Fannie Mae and Freddie Mac (the governmentsponsored enterprises, or GSEs) debt and securitieswill have on mortgage rates. The purpose of theprogram was to support the mortgage market in the

aftermath of the financial market meltdown and theconservatorship of the GSEs. By doing so, the Fed

Source: Federal Reserve Board / Haver Analytics


4/14

NOTES:

Home sales jumped sharply in October, especially for existing homes, probably in anticipation of the end of the first-time homebuyer tax cred

House price declines have moderated, but seasonal declines lie ahead.

Multifamily starts have collapsed to all-time lows, with little near-term prospect of a meaningful rebound.

Page 4

098765

450

375

300

225

150

75

0

200

160

120

800

400

0

Months Existing New

October 2008 10.2 11.1

October 2009 7.0 6.7

% ChangeSingleFamily

MultiFamily

Oct-08 to Oct-09 -10.86 -76.86

Sept-09 to Oct-09 -6.85 -34.57

098765

7500

6750

6000

5250

4500

3750

1400

1200

1000

800

600

400

200098765

240000

220000

200000

180000

160000

2800

2600

2400

2200

2000

098765

12.5

10.0

7. 5

5. 0

2. 5

12.5

10.0

7. 5

5. 0

2. 5

HOUSING STARTS(THOUSANDS OF UNITS)MONTHS SUPPLY OF HOMES

HOME SALES(THOUSANDS OF UNITS)

MEDIAN HOME PRICES($ )

Total Existing

(Left Axis)

New

(Right Axis)

Total Existing

(Left Axis)

New

(Right Axis)

Total Existing

(Left Axis)

New

(Right Axis)

Single-Family

(Right Axis)

Multi-Family

(Left Axis)

% Change Existing New

Oct-08 to Oct-09 -7.14 -0.47

Sept-09 to Oct-09 -1.65 0.71

Housing Market Indicator

Source: National Association of Realtors/ Census Bureau/ Haver Analytics Source: National Association of Realtors/ Census Bureau/ Haver Analytics

% Change Existing New

Oct-08 to Oct-09 23.48 5.13

Sept-09 to Oct-09 10.11 6.17

Source: National Association of Realtors/ Census Bureau /Haver Analytics Sour ce: U.S. Censu s Burea u / Haver Anal ytics


5/14

NOTES:

Purchase applications nose-dived in November as the expiration of the first-time homebuyer tax credit approached.

Yields on 30-year fixed rate mortgages fell to record lows at the end of November, spurring a pickup in refinance volumes.

The ARM share of mortgage applications slipped in response to the drop in FRM rates.

Page 5

Percent30-Year

Fixed

1-Year

Adjustable

November 2008 6.09 5.26

November 2009 4.88 4.41

Percent Refinance ARM

November 2008 53.35 2.33

November 2009 72.47 5.17

098765

8000

6000

4000

2000

0

600

500

400

300

200

098765

7.0

6.5

6.0

5.5

5.0

4.5

4.0

098765

37.5

30.0

22.5

15.0

7. 5

0. 0

90

80

70

60

50

40

30

REFI/ARM SHARES(%)

MORTGAGE APPLICATIONS( INDE X: MARCH 16 , 1990 = 100 )

MORTGAGE RATES(%)

098765

16

12

8

4

0

1

1

8

4

0

Purchase(Right Axis)

Refinance(Left Axis)

Mortgage Market Indicato

30-YearFixed Rate

1-YearAdjustable

Rate

Source: Mortgage Bankers Association / Haver Analytics Source: Freddie Mac / Haver Analytics

% Change Purchase Refinance

Nov-08 to Nov-09 -23.86 55.52

Oct-09 to Nov-09 -19.78 0.97

ARM Share(Left Axis)

PERCENT OF MORTGAGES:

FORECLOSURE INVENTORY

Total

Prime

Subprime

Refinance Share(Right Axis)

Source: Mortgage Bankers Association / Haver Analytics Source: Mortgage Bankers Association / Haver Analytics

Percent Total Prime Subprime

3rd

Quarter 2008 2.97 1.58 12.55

3rd

Quarter 2009 4.47 3.20 15.35


6/14

NOTES:

Payroll employment declines have slowed nationally and in most states, but no states had more workers in October 2009 than a year earlier.

Home price declines moderated further in September across the country.

The number of states with double-digit home price declines over the past year is down to three, while the number with price gains is up to 14

(as Tennessee rounded down to zero).

-6.9% to -5.0%

-5.0% to -3.5%

-3.5% to -2.0%

-2.0% to 0.1%

-22.5% to -8.0%

-8.0% to -4.0%

-4.0% to 0.0%

0.0% to 8.1%

Page 6

12-MONTH CHANGE IN PAYROLL EMPLOYMENT

OCTOBER 2009

12-MONTH GROWTH IN HOUSE PRICES

SEPTEMBER 2009

Arizona -6.9% Vermont -3.5%

Michigan -6.4% New Mexico -3.2%Nevada -6.0% Maine -3.2%

Georgia -5.6% Pennsylvania -3.2%

Wyoming -5.5% South Carolina -3.2%

Idaho -5.3% Massachusetts -3.1%

Oregon -5.2% New Jersey -3.0%

Indiana -5.2% Mississippi -3.0%

Illinois -4.8% Washington -2.9%

Alabama -4.8% West Virginia -2.9%

California -4.6% Texas -2.9%

Ohio -4.6% Iowa -2.8%

North Carolina -4.5% Missouri -2.8%

Wisconsin -4.5% New York -2.8%

Kentucky -4.4% Oklahoma -2.7%

Florida -4.4% New Hampshire -2.5%

Rhode Island -4.4% Nebraska -2.4%

Colorado -4.3% Virginia -2.4%

Delaware -4.2% Arkansas -2.4%

Connecticut -4.2% Louisiana -2.3%

Kansas -4.2% Maryland -2.0%

Tennessee -4.0% South Dakota -1.9%

Minnesota -4.0% Montana -1.2%

United States -3.9% Alaska -0.9%

Hawaii -3.8% North Dakota -0.3%

Utah -3.8% District of Columbia 0.1%

Nevada -22.5% New Mexico -1.6%

Florida -18.5% Kentucky -1.5%

Arizona -12.2% North Carolina -1.5%

Illinois -8.2% Wisconsin -1.3%

Georgia -8.1% Wyoming -0.9%

Oregon -8.0% Minnesota -0.8%

California -7.9% Massachusetts -0.8%

Washington -7.5% Colorado -0.8%

New Jersey -6.6% Rhode Island -0.7%

Vermont -6.5% Ohio -0.6%Maryland -6.5% Alaska -0.4%

District of Columbia -6.0% Iowa -0.1%

Connecticut -5.7% Tennessee 0.0%

Maine -5.3% Indiana 0.2%

New Hampshire -5.1% Missouri 0.2%

Hawai

Regional Roundup

Source: Bureau of Labor Statistics / Haver Analytics

i -4.8% Montana 0.3%

Alabama -3.7% Kansas 0.4%

Utah -3.7% Arkansas 0.7%

United States -3.5% Mississippi 0.8%

Michigan -3.2% South Dakota 0.9%

Delaware -2.9% Texas 1.0%

Pennsylvania -2.7% Nebraska 1.2%

Idaho -2.2% Oklahoma 1.3%

South Carolina -2.0% North Dakota 2.4%

New York -1.9% Louisiana 4.3%

Virginia -1.7% West Virginia 8.1%Sou rce : First American CoreLogic, LoanPerformance HPI


7/14

NOTES:

Foreclosure rates rose across the country in the third quarter, with subprime performance about five times worse than prime but the ratio of

prime-to-subprime is the highest since 1998.

The Great Plains, West South Central, and East South Central states tend to have significantly lower prime foreclosure rates than the rest of

the country.

Subprime foreclosure rates are in double-digits in most of the country.

0.77% to 1.50%

1.50% to 2.00%

2.00% to 2.50%

2.50% to 9.63%

4.26% to 8.00%

8.00% to 12.00%

12.00% to 16.00%

16.00% to 32.21%

Page 7

PERCENT OF PRIME MORTGAGES IN FORECLOSURE

3R D QUARTER 2009

PERCENT OF SUBPRIME MORTGAGES IN FORECLOSURE

3RD

QUARTER 2009

Florida 9.63% Kentucky 1.88%

Nevada 7.53% District of Columbia 1.86%Arizona 4.70% Mississippi 1.84%

California 4.48% Colorado 1.80%

Illinois 3.59% Louisiana 1.80%

New Jersey 3.46% Iowa 1.78%

United States 3.20% Oklahoma 1.66%

Michigan 3.18% Pennsylvania 1.65%

Ohio 2.93% New Hampshire 1.60%

Idaho 2.72% Virginia 1.59%

Indiana 2.66% Washington 1.55%

Hawaii 2.62% West Virginia 1.54%

Rhode Island 2.56% Alabama 1.50%

Maryland 2.51% Vermont 1.50%

Georgia 2.49% Tennessee 1.47%

Maine 2.47% Kansas 1.46%

Minnesota 2.41% Missouri 1.41%

South Carolina 2.39% North Carolina 1.39%

Wisconsin 2.36% Nebraska 1.33%

New York 2.26% Arkansas 1.32%

Utah 2.17% Montana 1.19%

Massachusetts 2.14% Texas 1.13%

New Mexico 1.96% South Dakota 1.08%

Connecticut 1.94% Alaska 1.06%

Oregon 1.89% Wyoming 0.90%

Delaware 1.88% North Dakota 0.77%

Florida 32.21% Michigan 11.05%

Nevada 24.56% South Carolina 10.97%

New Jersey 22.59% Indiana 10.96%

California 19.01% South Dakota 10.48%

Arizona 18.26% Georgia 10.43%

Hawaii 18.23% Washington 10.30%

Illinois 17.96% Montana 10.24%

Maine 17.20% Colorado 10.01%

New York 16.54% New Hampshire 9.72%

Wisconsin 16.19% Virginia 9.67%Connecticut 15.92% Pennsylvania 9.55%

Rhode Island 15.84% Louisiana 9.35%

Massachusetts 15.48% North Dakota 9.12%

District of Columbia 15.42% Oklahoma 9.11%

Vermont 15.39% Mississippi 8.37%

United States 15.35% Kansas 8.12%

Maryland 15.25% Nebraska 7.73%

Minnesota 15.13% Wyoming 7.64%

Idaho 13.65% North Carolina 7.40%

Delaware 13.44% Missouri 7.19%

Utah 13.22% Tennessee 7.19%

Ohio 12.88% Alabama 7.03%

Oregon 12.48% West Virginia 6.95%

New Mexico 11.77% Texas 6.86%

Kentucky 11.18% Arkansas 6.67%

Iowa 11.17% Alaska 4.26%

Source: Mortgage Bankers Association / Haver Analytics

Sou rce : Mortgage Bankers Association / Haver Analytics

Regional Roundup


8/14

Region in Focus: The Midwest

REGION IN FOCUS

*The Midwest regionincludes IA, IL, IN, KS,MI, MN, MO, ND, NE,OH, SD, AND WI.

**All Region in Focusgraphs contain datagathered from BLS, FirstAmerican CoreLogic,LoanPerformance HPI,and MBA.

Michigan has been hit hard by the recent economic

downturn, although its economic performance began todiverge negatively from the nation beginning in 2003.The job market is still performing much worse thaneven the poor national average. Payroll employmentcontinues to decline at a steady rate, and theunemployment rate is the highest of any state in thecountry. Home sales and prices in the state have bothrisen recently, but the ongoing job market weaknessthreatens to overwhelm this incipient housingrecovery. According to the Bureau of EconomicAnalysis (BEA, a portion of the CommerceDepartment), per capita personal income in the stateincreased in the third quarter after a big drop in theprevious quarter, but is still down by 3.1 percent froma year earlier. Credit quality continues to weaken andis worse than the national average. Outmigration issignificant as a result of the states bleak economicconditions reducing potential housing demand andincreasing the supply of homes for sale, or abandoned.On the positive side, unemployment rates dropped a bitthroughout the state in October and auto productionhas increased recently.

Michigans unemployment rate generally increasedover the past three years. In October, however, theunemployment rate slipped to 15.1 percent, althoughthat is still more than double its cyclical low of 6.5percent in October 2006. The unemployment rates inthe states metropolitan statistical areas (MSAs) andmetropolitan divisions (MetDivs) all decreased in the

recent month. In the Warren-Troy-Farmington Hills

MetDiv, the states largest, the unemployment rate fel

to 16.0 percent from 16.6 percent, although it balloonedfrom 8.5 percent a year earlier. The unemployment ratein the Detroit-Livonia-Dearborn MetDiv, the secondlargest, dropped to 17.7 percent in October from 18.2percent the prior month but it was also higher than itsyear-earlier level of 10.7 percent. Ann Arbor has beenthe best performing MSA in the state, with the lowesunemployment rate at 8.8 percent. For the state, therehave been 262,700 payroll job losses over the past year,a decline of 6.4 percent compared with the national dropof 3.9 percent. While many sectors have had steep joblosses, manufacturing suffered the most largely due toauto workforce reductions, down by 96,300 jobs (or17.2 percent) over the past year. Manufacturingemployment has been in a long sustained decline, with

job losses of 446,500 jobs (or 49.1 percent) from itpeak in July 1999.

While economic conditions in Michigan remain poorhome sales have improved recently. According toMoodys Economy.com, existing single-family homesales rose by 5.9 percent in the third quarter and wereup by 12.3 percent from a year earlier. The DetroitLivonia-Dearborn and Warren-Troy-Farmington HillsMetDivs saw third quarter sales increases of 0.7 and 6.8percent, respectively. Even with the recent gains in thestate, home sales were still down from a year earlier inone-third of the MSAs. The worst performance was inBattle Creek, with a drop of 47.2 percent.

(Continued on page 9)Page 8

The Midwest has been significantly affected by the Great Recession although the impact varies greatly from stateto state within the region. While unemployment rates are extremely high in heavily industrialized (especially autostates such as Michigan (15.1 percent), they are also low in other states such as North Dakota (4.2 percent). Somstates have suffered double-digit house price declines from their peaks, while house prices in other states have

barely declined at all. Despite these differences amongst the states in the region, per capita personal incomes in thMidwest have fallen at the slowest rate of all four Census regions over the past year. Manufacturing seems to be onthe road to recovery, and even auto production is slowly increasing in the wake of low inventories and a modespickup in sales. The economic outlook for this region looks much less bleak than it did earlier this year.

The labor market in the Midwest has weakened in response to the recession. Regional job losses have been broadbut construction and manufacturing have been hit the hardest. The regions average unemployment rate rose to10.0 percent in October, the second highest of all the four Census Regions, and up from 6.6 percent a year earlierFor the nation as a whole, the unemployment rate increased to 10.2 percent from 6.6 percent over the same period.

The Midwest had the second largest home sales increase of the four regions over the past year. According to thNational Association of Realtors, third quarter existing single-family home sales in the Midwest increased by 6.5percent from a year earlier the first year-over-year gain since the first quarter of 2006. This increase resultedfrom quarterly increases of 2.4 percent in the second quarter and 11.9 percent in the third. Prior to this, existinsingle-family home sales declined for eight of the previous nine quarters. The median sales price of existingsingle-family homes sold in the Midwest edged up to $150,100 in the third quarter, an increase of 2.5 percent from

the prior quarter in part because of seasonal factors, but also because of the increase in sales. Over the past yearexisting home prices in the region were down by 5.6 percent, and by 14.2 percent from their quarterly peak.

Credit quality in the Midwest region has performed better than the national average. According to the MortgageBankers Association (MBA), the rate of foreclosures started in the region rose to 1.25 percent (non-seasonallyadjusted, or NSA) during the third quarter of 2009. This compares with a national average of 1.42 percentSeriously delinquent loans (those 90-days or more past due plus foreclosures) climbed to 8.19 percent of the totalbut this was still below the national average of 8.85 percent. At the end of the third quarter, 5.31 percent of alconventional prime mortgages and 27.02 percent of conventional subprime mortgages in the Midwest wereseriously delinquent. The national averages were 6.26 and 28.68 percent, respectively. The Midwest also had slightly better delinquency rate on all loans, at 9.89 percent, than the national average of 9.94 percent.

Michigan


9/14

And while home sales in the state are up in the mostrecent quarter and from a year earlier, they are still

significantly lower than they were two years ago.According to NAR, third quarter total existing homesales in Michigan were up by 11.0 percent over thepast year and down by 1.4 percent over the past two

years (and down by 21.8 percent from the peak in thesecond quarter of 2004).

According to data from First American CoreLogicsLoanPerformance House Price Index (LP HPI), homeprices in Michigan declined by 3.2 percent for the 12months ending in September 2009, slightly better than

the national decline of 3.5 percent. Twelve of thestates MSAs suffered house price declines over thepast year. The Monroe MSA had the largest decrease,dropping by 7.4 percent over that 12 month period.

Warren-Troy-Farmington Hills had a price decline of7.0 percent, while Detroit-Livonia-Dearborn,performed better, but still had a price drop of 1.7percent. The Muskegon-Norton Shores MSA was the

best performing, with home prices increasing by 4.1percent.

In part because of significant job losses, credit quality

in Michigan is worse than the national average.

Michigan (continued from page 8)

Minnesota has suffered from the recession, but itseconomy finally appears to be improving. Theunemployment rate remains over 2.5 percentage pointsbelow the national average, while payroll employment

has decreased at a slower rate recently. Creditconditions continue to worsen, but credit behaviorremains better then the national average. Home priceshave declined over the past couple of years, but have

been up for the majority of this year. Home sales havenot followed the same path, however, and havedeclined over the past two quarters. The states per

capita personal income, which has decreased for threeconsecutive quarters, is now down by 3.1 percent overthe past year. Overall economic conditions are better

than in many states, but are still far from normal.

The unemployment rate in Minnesota has increased,

but at a slower pace than the national average. In

October, the states unemployment rate averaged 7.6percent, down from its peak at 8.4 percent in June, andbelow the national average of 10.2 percent. The largest

MSA, Minneapolis-St Paul, had an unemployment rateof 7.1 percent. The Duluth-Superior MSA had the

.The MSA with the lowest unemployment rate wasRochester, at 6.1 percent. There have been 109,600

payroll job losses in the state, a decline of 4.0 percent,over the past year. While most sectors cut jobs,educational and health services have added them. Overthe 12 months ending in October, nearly 12,000 jobs

have been generated in that sector, a 2.6 percentincrease. As in many states, construction andmanufacturing lead the way in job losses over the pastyear, declining by 12.7 and 12.3 percent respectively.

highest unemployment rate in the state at 7.5 percent


Minnesotas large pickup in home sales during the fiquarter of this year has been followed by twconsecutive quarters of declining sales. According Moodys Economy.com, existing single-family hom

sales in the state decreased by 16.7 percent in the thiquarter from the prior quarter although they weonly down by 3.6 percent from a year earliecompared with a national increase of 5.0 percent ov

that period. Home sales decreased by 14.2 percent the Minneapolis-St Paul MSA, but fell the most Mankato-North Mankato (down by 34.5 percen

Home sales dropped the least in Duluth, down by 6percent. Unlike many states, home sales in Minnesohave remained weak in the past couple of quarte

According to the NAR, third quarter total existinhome sales in the state were down 15.7 percent frothe previous quarter and by 4.7 percent over the pa

year.While home sales in Minnesota have remained in adownward spiral, home prices have increased in six

consecutive months, although they are still down(barely) from a year ago. According to data from LPsHPI, home prices in Minnesota decreased by only 0.8percent in the 12 months ending in September, betterthan the national average decrease of 3.5 percent.

While Minneapolis-St. Paul-Bloomington and St.Cloud had house price drops of 1.0 and 1.6 percent,respectively, over the past year, the other three MSAsin the state all had approximately the same house pric

increases, rising by about 0.7 percent each.


Minnesota

According to the MBA, the delinquency rate on mortgages in the state was 12.64 percent (NSA) durithe third quarter of 2009, up by 107 basis points frothe prior quarter. This compares with a nation

average of 9.94 percent. Seriously delinquent loawere 10.42 percent, above the national average of 8.percent. At the end of the third quarter, 6.88 percent all conventional prime mortgages and 28.94 percent

conventional subprime mortgages in Michigan weseriously delinquent. The national averages were 6.and 28.68 percent, respectively. The states neforeclosure rate is still high at 1.70 percent, compare

with the national average of 1.42 percent.

Page 9

10.42

15.1

-3.2

8.85

-3.5

10.2

-8.0

4.0

8.0

12.0

16.0

20.0

House Price

Appreciation

Sep 08 - Sep 09

Unemployment

Rate Oct 2009

Seriously

Delinquent

Mortgages 2009

Michigan

U.S.

-4.0

0.0


10/14

Credit quality in Minnesota is better than the nationalaverage. According to the MBA, the rate offoreclosures started in the state was 1.12 percent(NSA) during the third quarter of 2009, increasing by

six basis points from the prior quarter. This compareswith a national average of 1.42 percent. Thedelinquency rate on all mortgages in the state was 6.98percent, less than the national average of 9.94 percent.

Seriously delinquent loans were 6.47 percent, alsobelow the national average of 8.85 percent. At the endof the third quarter, 4.62 percent of all conventional

prime mortgages and 26.73 percent of conventionalsubprime mortgages in Minnesota were seriouslydelinquent. The national averages were 6.26 and 28.68

percent, respectively.

Minnesota (continued from page 8)

The recession did not affect Nebraska as much as manyother states, and there are a number of signs ofrecovery in the state. The average unemployment ratein Nebraska is less than half than for the U.S. Home

sales and prices did not suffer a steep decline since thestate didnt have the bubble-like conditions thatcovered much of the country from 2002-2007, and thehousing market is recovering more quickly than most

of the nation. Credit conditions continue to weaken, butremain in better shape than the majority of the country.Like Minnesota, Nebraskas per capita personalincome, has decreased for three consecutive quarters,

and is now down by 2.9 percent over the past year.

Although the labor market in Nebraska continues toweaken, as in most states, it is performing much betterthan the national average. The states payrollemployment has dropped by about 23,600, a 2.6percent decrease since its peak in May 2008 one of

the smallest declines in the nation. And unlike manyother states, construction employment dropped by only3.0 percent over the past year. Theprofessional/business services and manufacturing

sectors did not fare as well, however, losing 8.3 and10.2 percent of their jobs in the past year, respectively.In October, the states unemployment rate remained at

4.9 percent, higher than its year-ago rate of 3.6percent, but much lower than the national average of10.2 percent. The Omaha-Council Bluffs-Fremont

MSA had the highest unemployment rate in the state at4.8 percent. The MSA with the lowest unemploymentrate was Lincoln, at 4.2 percent.

Single-family existing home sales in Nebraska have

increased by 21.6 percent during the year ending in the

third quarter 2009. Sales in the state saw moreimprovement in the third quarter, up by 6.0 percent fromthe second quarter. Home sales in the Omaha-CouncilBluffs MSA rose by 1.3 over the recent quarter and by

11.5 percent from a year earlier. Sales of existing homesin the Lincoln MSA increased at an even faster rate, by13.0 over the recent quarter and by 32.2 percent from

one year ago. According to NAR, third quarter total

existing home sales in the state were up by 20.3 percefrom a year earlier, and have only dropped by 16percent from their peak in the second quarter of 2004one of the smallest declines in the nation.

performed much better over the past year. According toMoodys Economy.com, single-family home sales


Home prices in Nebraska have remained more stabthan in many of the other states in the U.S., most

reflecting the lack of a huge run-up in prices earlier thdecade. According to data from LPs HPI, home prichave increased by 1.2 percent in the 12 months endiin August, much better than the national avera

decline of 3.5 percent. The state is now only down 2percent from its peak in June 2006. Over the morecent 12-month period, the Omaha-Council Bluf

MSA had house price gains of 1.7 percent. Lincolhowever, had house price losses of 1.0 percent

As in Minnesota, credit quality in Nebraska is bettthan the national average. According to the MBA, t

rate of foreclosures started in the state was 0.73 perce(NSA) during the third quarter of 2009, up by 8 baspoints from the prior quarter. This compares withnational average of 1.42 percent. The delinquency ra

on all mortgages in the state was 6.41 percent, belothe national average of 9.94 percent. The share seriously delinquent loans in Nebraska was only 4.

percent, less than half the national average of 8.8percent. At the end of the third quarter, 2.73 percent all conventional prime mortgages and 17.22 percent

conventional subprime mortgages in Nebraska weseriously delinquent. The national averages were 6.and 28.68 percent, respectively.

Nebraska

Page 10

4.9 4.13

1.3

-3.5

10.28.85

-8.0

-4.0

0.0

4.0

8.0

12.0

House Price

Appreciation

Sep 08 - Sep 09

Unemployment

Rate Oct 2009

Seriously

Delinquent

Mortgages 2009

Nebraska

U.S.

-0.80.0

7.6

6.47

8.85

-3.5

10.2

-8.0

-4.0

4.0

8.0

12.0

House Price

Appreciation

Sep 08 - Sep 09

Unemployment

Rate Oct 2009

Seriously

Delinquent

Mortgages 2009

Minnesota

U.S.


11/14


Selected Housing / Economic Indicat

Page 11

State

MSA

Oct-09

Sep-09

3rdQtr09

2ndQtr08

3rdQtr09

2ndQtr09

Illinois

Indiana

Iowa

Kansas

Mich

Minnesota

Missouri

Nebraska

NorthDakota

Ohio

SouthDakota

Wisconsin

Source:Bu

*State,Reg

HousePriceAppreciation

UnemploymentRate*

AnnualizedQuarterlyRate

HousingVacancyRate

11.0

10.5

17.73

4.60

1.80

2.30

Chicago-Naperville-Joliet

10.4

10.1

16.08

-0.81

2.50

2.10

LakeCounty-KenoshaCounty

10.2

9.9

15.70

-6.82

-

-

Peoria

11.7

11.1

15.52

0.44

-

-

9.7

9.8

-1.57

-2.44

1.80

2.70

Evansville

7.9

7.7

-1.45

-0.19

-

-

FortWayne

10.3

9.5

-2.97

-3.66

-

-

Gary

9.2

9.2

-5.37

-3.90

-

-

Indianapolis-Carmel

8.1

7.9

-1.29

-2.39

2.90

3.20

6.7

6.6

3.94

14.08

1.70

1.20

DesMoines-WestDesMoines

5.7

6.1

5.53

15.05

-

-

6.8

6.9

-1.35

-0.35

2.70

2.80

Witchita

7.9

8.5

-0.07

0.61

-

-

igan

15.1

15.3

5.80

8.38

3.20

3.60

AnnArbor

8.8

9.3

9.75

11.25

-

-

Detroit-Livornia-Dearborn

17.7

18.2

8.35

6.36

3.30

3.00

Flint

15.2

15.8

-8.49

5.74

-

-

GrandRapids-Wyoming

11.4

11.9

15.72

11.92

6.20

3.50

Lansing-EastLansing

10.6

11.0

10.01

13.13

-

-

Warren-Troy-FarmingtonHills

16.0

16.6

-0.28

-3.12

3.30

3.00

7.6

7.4

27.25

9.64

2.10

2.40

Minneapolis-St.Paul-Bloomington

7.1

7.4

26.28

9.47

2.20

1.80

9.3

9.5

-0.75

-3.02

2.60

2.00

KansasCity

8.4

8.9

-1.79

-0.81

4.30

3.60

St.Louis

9.8

9.9

18.24

29.48

1.50

1.50

Springfield

8.0

8.3

-1.24

-1.82

-

-

4.9

4.9

6.97

17.97

1.60

1.50

Omaha-CouncilBluffs

4.8

4.9

5.57

17.27

2.10

1.50

4.2

4.1

13.63

-1.42

2.90

2.00

10.5

10.1

38.03

14.16

3.60

2.70

Akron

9.7

9.5

29.72

28.24

3.40

2.50

Cincinnati-Middletown

9.7

9.4

-1.81

-1.60

4.50

2.80

Cleveland-Elyria-Mentor

8.6

8.3

35.26

-5.28

3.60

2.30

Columbus

8.4

8.2

31.15

20.64

2.80

1.20

Dayton

11.0

10.7

31.91

10.85

5.40

1.20

Toledo

11.4

11.1

37.86

9.67

3.50

3.90

Youngstown-Warren-Boardman

12.5

12.3

8.49

-4.90

-

-

5.0

4.8

-0.14

-0.52

1.60

2.00

8.4

8.4

13.10

20.66

2.50

1.60

Madison

5.5

5.6

3.38

6.31

-

-

Milwaukee-Waukesha-WestAllis

8.2

8.5

22.87

2.19

1.40

1.80

United

States

10.2

9.8

6.71

14.29

2.60

2.50

reauofLaborStatistics/FirstAmericanCore

Logic,LoanPerformanceHPI/U.S.CensusB

ureau/HaverAnalytics

ions,andU.S.unemploymentratesareseasonallyadjusted.MSAunemploymentratesarenotseasonallyadjusted


12/14

Special Topic (Continued from cover page)

(not to mention the potential for asset bubbles to

be generated). In the current period, however, the

added liquidity has not had a big impact as

depository institutions have cut back on lending

even more rapidly than the Fed has increased

liquidity. This can be seen in figure 2, which

shows excess reserves held by banks. Normally

banks try to keep excess reserves to a minimum,

as they earn no income on them, but in the

current period banks have allowed them to soar in

response to credit concerns. As a result, the

exceptional increase in liquidity has resulted in

neither a surge in economic growth nor a rise in

inflation (although there are growing concerns

that bubbles, especially in commodity markets,

are being created).

(Continued on pg. 13)

Page 11

The Feds addition of liquidity to the economy

has been truly historic, as shown in figure 1. The

monetary base tends to grow at a relatively slow

and stable rate over time in normal periods.

Careful inspection of the data reveals a bump in

2000, related to Y2K, as the Fed attempted to

ensure that the economy had sufficient liquidity

in case computers and related devices (e.g.,

ATMs) had problems. What seemed like a surge

of liquidity at the time, however, pales in

comparison with the flood of liquidity that the

Fed has unleashed during the recent financial

crisis.

During normal economic periods, a surge of

liquidity of this magnitude would result in a spike

in economic activity, a jump in inflation, or both

0 5050

2 1 0 0 0 0 0

1 8 0 0 0 0 0

1 5 0 0 0 0 0

1 2 0 0 0 0 0

9 0 0 0 0 0

6 0 0 0 0 0

3 0 0 0 0 0

0

2 1 0 0 0 0 0

1 8 0 0 0 0 0

1 5 0 0 0 0 0

1 2 0 0 0 0 0

9 0 0 0 0 0

6 0 0 0 0 0

3 0 0 0 0 0

0

Figure 1: The Monetary Base has Skyrocketed

Millions

$

$

0 9876543210

1 . 2

1 . 0

0 . 8

0 . 6

0 . 4

0 . 2

0 . 0

1 . 2

1 . 0

0 . 8

0 . 6

0 . 4

0 . 2

0 . 0

Figure 2: Excess Reserves have Soared



Trillions

$Trillions$

Page 12


13/14


14/14

pmi’s monthly analysis of economic, housing, and mortgage market conditions

Documents