By Isobel Kennedy

NEW YORK (MNI) – Some of the economic indicators covering
the housing sector this week were encouraging but not enough to
eliminate the sector as a drag on the U.S. economy.

The November housing starts data came in at +9.3% to 685k and
permits +5.7% to 681k and both were well above expectations.

While the Starts strength was centered in 5+ units at +32.2% after
-20.2%r in October 1-family starts were +2.3%, and continue to advance
on gains in the West and Northeast. Starts in the Midwest were -14.5%
and the South -1.3%.

The year-over-year gain for housing starts is +24.3% i and appears
to be gathering momentum.

Permits were +1.6% for singles and +16.1% for 5+ units, and
apartment building appears to be gaining in the Northeast and West.

While Completions were hardly robust at -5.6% and units under
construction +1.9%, the overall numbers show continued improvement into
Q4.

November existing home sales were +4.0% to 4.42 million, which was
above expectations. But the data was considered somewhat irrelevant
because of a -14% rebasing going back four years.

Existing home sales for 2007 were revised to 5.04 million versus
the previous estimate of 5.652 million. Sales for 2008 revised to 4.11
million vs. previous estimate of 4.913 million. Sales for 2009 revised
to 4.34 million vs. 5.156 million. And sales for 2010 were revised to
4.19 million vs. previous estimate of 4.908 million.

Commenting on the rebasing, an economist at National Association of
Realtors said he knew things were bad but it now appears that were even
worse than originally thought.

The economist now predict that 2011 sales will total 4.25 million,
just a small increase over last year’s rebenchmarked total.

The NAR also look for a 5% increase in existing home sales for 2012
and “a beginning of price stabilization.”

In the November report, median home prices were $164,200 up from
$160,800 in October but -3.5% year over year.

The month’s supply at the current sales rate is down to 7.0, which
is almost a 5-year low.

Not everyone saw the glass as half-empty, however. Economist Steven
Stanley at Pierpont Securities said in a report that the trends in the
revised existing home data “look quite good, extending a string of
recent releases suggesting that the housing sector is starting to
finally awaken from a 5-year coma.”

Stanley points out a few good signs:

1) The November existing home sales rise of 4% to a 4.42 million
annualized pace looks encouraging vs. the revised data. It is the best
level since 2007 when compared to the revised data;

2) While a normal pace would have a “5-handle.” and the peak was
over 7 million in 2005, there is modest progress being made;

3) Existing homes for sale in November were 2.58 million, the
lowest level since 2006;

4) The months’ supply at 7.0 months is the second-lowest –
behind the peak month of the first homebuyer’s tax credit – since early
2007.

5) There is still a huge shadow inventory of homes in some stage of
delinquency or foreclosure but the market “is chewing through the
overhang.” Corelogic said Wednesday its latest estimate of shadow
inventory is down to 1.6 million vs. 1.9 million three months ago and a
peak of over 2 million last year.

“Even that lower number is another 4 to 5 months worth of supply,”
Stanley says, “so the ‘true’ supply may still be almost a year’s worth,
nearly double the level that has historically been associated with a
healthy market.”

Stanley concludes, “But progress is coming, even if it is baby
steps and that, in and of itself, is a huge step.”

Also on a brighter note, low mortgage rates have allowed some
homeowners to lock in very attractive mortgage rates. But things have
started to slow down for the year as many analysts had predicted.

The Mortgage Bankers Association said Wednesday that the Refinance
Index fell 1.6% in the week ended December 16. The Purchase Index fell
4.9% and the Composite Index, which measures mortgage loan applications,
fell 2.6%.

While the 30-year conforming loan rate continues to hover around
4.00%, the MBA said, “Remarkably low rate are not enough, as many
homeowners continue to hold back due to lack of equity in their
properties, poor credit and a week job market.”

Steven Wood at Insight Economics said the while the mortgage
application index is 37.4% above its year ago level, it is still in the
middle of the range it has held for two years.

Refinancing, on the other hand, is 60.1% above last year’s level
and “appears to be on a modest rising trend,” Wood said.

For trader and investors in the agency mortgage-backed securities
market, the woes in the housing market continue to be good news.

Prepayment levels continue to be muted and that means paper is not
called away from investor portfolios. This makes securities with a
prepayment option more attractive.

And refinancing activity also remains muted for many reasons and
that means new supply into the market is also manageable.

And the New York Federal Reserve, of course, is buying the bulk of
new paper that does come into the market under the mortgage reinvestment
plan it announced on September 21.

For the period from December 13 to January 12, the Fed expects to
buy $30 billion agency MBS as it receives a like amount of prepayments
in its own mortgage portfolio. That is up from $28 billion in the
previous 30-day period.

The mortgage market is still not sure how many prepayments will
result from the government’s HARP 2.0 program, which is aimed at helping
homeowners that are current on their mortgages refinance their loans
even if their homes are underwater by over 125% loan-to-value.

One MBS trader at a primary dealer did a survey yesterday asking
customer if lower coupon MBS will widen, tighten or do nothing for the
rest of the year, in January 2012 and in the first-half of 2012.

The results show that both January and the first half of 2012
should prove good for lower coupons.

Widen Nothing Tighten
Rest of Year: 37% 32% 31%
Jan 2012: 20% 15% 65%
H1 2012: 20% 15% 65%

Another plus for the mortgage market is the fact that the Fed may
have to provide more stimulus in 2012.

Mortgage traders believe that if the Fed is forced to do QE3 an
outright buying program in MBS could be part of it.

In general, however, most American traders and investors are truly
hoping the new year brings a better economy both in terms of jobs and
housing.

While QE3 might benefit their profit and loss statements in the new
year, traders really want a fundamental improvement in the economy and
the lives of their family and friends.

** Market News International New York Newsroom: 212-669-6430 **

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