Weekly Economic Update-Grazie Italia

Interest rates fell back this week; in the case of mortgage rates it was the first decline in a month. The reason was the classic “flight to safety” that economists love to cite. In this case investors were fleeing some scary government goings-on in Italy.

Home prices are also getting a bit scary for some people. Case-Shiller’s indices were up strongly again, and NAR’s chief economist is getting a little worried. Perhaps the poor showing of NAR’s pending sales numbers stoked his anxiety.

Economists often speak about a “flight to safety” in connection with volatile interest rates. This week gave us a primo example. After climbing for months, interest rates began to slide on Friday and then nosedived Tuesday. Ten-year Treasury notes, the instrument most closely associated with mortgages rate, were at 3.06% on Thursday, 2.93% on Friday, and 2.77% after the long weekend. Freddie Mac says the 30-year fixed mortgage rate is down 10 basis points.

There was no apparent domestic reason, unemployment is at a decade low and the economy is perking along. However, things aren’t so sanguine in Italy. The government there is in turmoil, with some talk of the country leaving the European Union.

In the words of New York Magazine’s Jonah Shepp, “Bond markets, those bellwethers of geopolitical anxiety, freaked out, fearing the possibility of Italy ending up with an even more extreme populist government that would abandon the euro, leave the European Union, or default on Italy’s 2.3 trillion euros of sovereign debt.”

On Tuesday, the euro sank, Italian bond yields shot up, and there was nearly a 400-point drop in the Dow Jones Industrial Average. And where did all that money go? To what are generally thought to be the safest investments in the world, U.S. Treasury notes and bills. When more investors demand them, Uncle Sam can pay less in interest.

Worrisome Signs?

The third home sales report for April, the National Association of Realtors’ (NAR’s) Pending Home Sales Index, was no better for new and existing sales. The PHSI, a leading indicator for existing sales, fell 1.3%, from its March reading of 107.8 to 106.4. This put the index behind its year earlier numbers for the fourth straight month.

There seems to be no ceiling on the S&P CoreLogic Case-Shiller home price indices. The National Index posted its second straight 6.5% annual increase and the 10-City and 20-City Composites rose 6.4% and 6.8% respectively. Some of the individual cities in those composites saw even more spectacular gains; 13.0% for Seattle, 12.4% in Las Vegas and, in San Francisco, prices were up 11.3%.

But these increases are getting worrisome, a least to NAR’s chief economist Lawrence Yun. He said of the Case-Shiller report, “The continuing run-up in home prices above the pace of income growth is simply not sustainable. From the cyclical low point in home prices six years ago, a typical home price has increased by 48% while the average wage rate has grown by only 14%. More supply is needed to level out home prices. Homebuilding will be the key as to how the housing market performs in the upcoming years.”



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