Market Comment

Mortgage bond prices fell last week pushing rates

higher despite continued signs of economic

weakness. The Senate approved additional TARP

funding pushing another $350 billion into the effort

to stem the credit crisis. Consumer sentiment

came in surprisingly better than expected despite

headlines dominated by news that financial firms

continue to struggle. Fed Chairman Bernanke

indicated the timing of a global economic recovery

was "highly uncertain." For the week, interest

rates on government and conventional loans rose

by  about 3/4 of a discount point.

The housing starts data Thursday will be the most

important event this week. The bond market is

closed Monday in honor of the Martin Luther King                 

Holiday. The market may be volatile when trading

resumes Tuesday.

Housing Starts

Housing starts data is a leading indicator of the state of our economy. This report, provided by the Bureau of the Census, takes into account data from both single-family homes and multi-family dwellings. Building permits are also released with the housing starts data. By knowing the number of permits issued monthly, analysts can attempt to estimate for the upcoming months. Normally, starts are 10% higher than permits since all locations are not required to have a building permit.

Housing starts and permits give a warning of future economic activity. In effect, a rise in housing starts can lead to a fall in the bond market and vice versa. Consumers tend to hold off on the purchase of new homes, new cars, and other big-ticket items if they are worried about the future of the economy. Housing is an important part of our economy. Continued declines in housing starts can lead to continued economic slowdown and essentially a deeper recession. On the other hand, increases in housing starts could signal a possible reversal.

From the opposite perspective, changes in interest rates often lead to changes in housing starts. High interest rates can cause a significant decline in home sales, which can lead to a drop in housing starts. Just the opposite happens when rates drop and is one of the additional reasons the Fed is trying to keep rates low. Low mortgage rates affect both home sales and housing starts.

The housing market across the country is a vital component in sustaining the economy. For some time homeowners generally saw an increase in the value of their homes. Unfortunately now that has all changed. The softening of the housing market tied to credit concerns continues to have many worried. Most economists believe more pain is headed our way.

Additional stimulus spending to help the economy continues to make headlines. Fed Chairman Bernanke called for additional efforts to get toxic debt off the books of financial institutions.

There is still uncertainty regarding the future state of the economy. Bernanke recently warned that the timing of an economic recovery was "highly uncertain."

Mortgage bonds have been volatile and further improvements are not a given despite the recent Fed efforts to purchase mortgage bonds. The good news is

that mortgage interest rates remain historically low. A cautious approach to mortgage interest rate decisions is necessary to protect against future volatility.

Economic

Indicator

Release

Date & Time

Consensus

Estimate Analysis

Martin Luther King Holiday Monday, January 19 Important. Volatility may occur Tuesday when trading resumes

following the extended holiday weekend.

Housing Starts Thursday, January 22,

8:30 am, et

Down 2.4% Important. A measure of housing sector strength. Larger than

expected decreases may lead to lower rates.

Weekly Jobless Claims Thursday, January 22,

8:30 am, et

504k Moderately important. An increase in jobless claims may bring

lower rates.

Olan Carder and Gary Palmer

MYERS PARK MORTGAGE

(Ph) 704.549.0724

olan@myersparkmortgage.