The bigger news was in the labor cost growth, which was less than half the pace expected by the financial markets. Unit labor costs—one of the measures to gauge wage pressures—increased by only 1.3 percent—the smallest annualized rate since the second quarter of last year, when unit labor costs declined. 

The small gain in unit labor costs confirms that wage pressures are still contained. On a year-over-year basis, however, labor costs rose by 4.3 percent, the strongest pace in nearly five years. Fed officials have recently expressed concerns regarding wage pressures stemming from a gradually tightening labor market and will be vigilant to remain ahead of the curve by continuing its tightening policy. The fed fund futures market expects that the funds rate will be at least 4.00 percent by year end.

Yesterday, the Fed hiked its target rate by 25 basis points for the 10th consecutive time, bringing the fed funds rate to 3.50 percent. The statement contained no surprises. The committee still viewed monetary policy as accommodative. It noted that spending growth has strengthened this year, despite rising oil prices, and the labor market continues to improve gradually. While inflation expectations are well-contained, inflationary pressures have remained elevated. Risks to inflation and economic growth remain roughly equal. Finally, the committee continued to maintain that monetary accommodation can be removed at a “measured pace.”

The yield on the 10-year Treasury notes hovered around 4.38 percent by late Tuesday afternoon, five basis points below Monday’s close. Since the last Federal Open Marketing Committee meeting in late June, the economic news has generally been upbeat, and the 10-year yield has risen by nearly 50 basis points.

(Orawin Velz is director of economic forecasting in the Mortgage Bankers Association’s economics and research department. She provides commentary and analysis on key monthly economic indicators. She can be reached at ovelz@mortgagebankers.org.)

Below is the FOMC statement in its entirety:

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3-1/2 percent.

The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Aggregate spending, despite high energy prices, appears to have strengthened since late winter, and labor market conditions continue to improve gradually. Core inflation has been relatively low in recent months and longer-term inflation expectations remain well contained, but pressures on inflation have stayed elevated.

The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern.

In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 4-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.
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The study from the Center for Housing Policy, “Paycheck to Paycheck: Wages and the Cost of Housing in America,” found that from the fourth quarter of 2003 to the first quarter of 2005, the cost of a median priced home increased from $186,000 to $225,000. At the same time, the annual income needed to qualify to purchase a home grew from $54,855 to $71,354. According to the study, wages for community workers such as elementary school teachers and police officers are still below the amount needed to purchase a home.

“Across the nation we are seeing a growing disparity between the skyrocketing home prices of recent years and the minimal increase, if not flattening, in wages for our nation’s community workers,” said Barbara Lipman, research director for the Center for Housing Policy. “Additionally, the disturbing trend of retail salespersons and janitors, and those in similar wage groups, paying in excess of what is considered affordable in order to rent a one- or two-bedroom apartment continues in metropolitan areas throughout the country.”

On the rental side, when comparing 2003 and 2005 data, the metropolitan area findings reveal that based on median income retail salespersons and janitors must pay an excessive portion of their income in order to rent a one- or two-bedroom apartment in the majority of U.S. cities studied.

American also said their personal financial situation as weaker than one month ago. One-in-five (21 percent) rate their current finances as strong compared to 24 percent in July.

The RBC CASH survey also found that consumers feel pessimistic for the second month in a row. The RBC CASH Index is a monthly national survey of consumer attitudes on the current and future state of local economies, personal financial situations, savings, and confidence to make large investments. The index is benchmarked to the 100 reading assigned.

For August, the index stands at 72.6 roughly unchanged from July. Fifteen percent of consumers think the strength of their local economy could be somewhat weaker six months from now, compare to 11 percent in July, the RBC Index noted. Overall, one-in-five, or 20 percent, of respondents said their local economy will be weaker in the future.

However, The Index found that consumers feel confident about job security. According to the RBC Jobs Index currently at 114.6 up from 109.6 in July, and forward looking over the next six months, 52 percent of consumers said it is unlikely that they, someone in their family or someone they know personally will lose a job as a result of economic conditions, RBC said.

"If people feel good about their jobs, they will feel good about their economic futures," said Vince Boberski, chief economist for RBC Dain Rauscher. "I see hope in this job index and I think this confidence in jobs could begin to translate into general consumer confidence later in the year."

"But, the continued weakness in the RBC CASH Index makes us more cautious about projections for the economy into 2006 and beyond," Boberski said.

In addition to providing data for the overall nation, Paycheck to Paycheck compares homeownership and rental affordability findings with median community wages for nearly 200 metropolitan areas and more than 60 occupations.

The Paycheck to Paycheck study is provided in online, which allows users to select and then identify housing affordability for the wide-range of occupations outlined. Wage information for the study is as of February 2005 and was provided by Salary.com.

The RBC CASH Index is based on a representative sample of 1,000 adults polled nationwide from August 1 through August 3 by survey-based research company Ipsos Public Affairs, Washington, D.C.
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The average contract interest rate for 30-year fixed-rate mortgages increased by 8 basis points last week to 5.91 percent from 5.83 percent, with points increasing to 1.24 from 1.16 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. Since reaching a 2005 low of 5.47 percent on April 8, the 30-year rate has either increased of stayed flat for six consecutive weeks. 

The average contract interest rate for 15-year fixed-rate mortgages increased by 8 basis points to 5.49 percent from 5.41 percent one week earlier, with points increasing to 1.29 from 1.13 (including the origination fee) for 80 percent LTV loans.

The average contract interest rate for one-year adjustable-rate mortgages (ARMs) increased by 10 basis points to 4.88 percent from 4.78 percent one week earlier, with points decreasing to 0.99 from 1.00 (including the origination fee) for 80 percent LTV loans. Since June 5, the one-year ARM rate has increased by 79 basis points.

The Market Composite Index stood at 745.0, a decrease of 0.9 percent on a seasonally adjusted basis from 752.1 one week earlier. On an unadjusted basis, the Index decreased by 1.3 percent compared with the previous week but was up by 20.8 percent compared with the same week one year earlier. The four-week moving average for the seasonally-adjusted Market Index is down by 1.5 percent to 763.1 from 774.9.

The seasonally-adjusted Purchase Index increased by 0.9 percent to 498.8 from 494.5 the previous week and is at its highest level in a month. The four-week moving average for this Index is up by 0.5 percent to 491.8 from 489.3. The seasonally adjusted Refinance Index decreased by 3.3 percent to 2176.5 from 2250.3 one week earlier; the four-week average is down by 3.9 percent to 2341.3 from 2435.8.

Other seasonally adjusted index activity includes the Conventional Index, which decreased by 0.7 percent to 1122.2 from 1130.1 the previous week, and the Government Index, which decreased by 4.9 percent to 115.3 from 121.3 the previous week. 

The refinance share of mortgage activity decreased to 40.9 percent of total applications from 41.7 percent the previous week. The ARM share of activity increased to 29.7 percent of total applications from 28.5 percent the previous week.

The survey covers nearly 50 percent of all U.S. retail residential mortgage originations, and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts.
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In the U.S., the national office market grew for the ninth consecutive quarter, according to a report by Colliers International, a global real estate services firm. In Europe, the German office market represented a bright spot for a commercial economy that had been in a slump, according to IVG Immobilien AG and Cushman & Wakefield Healey & Baker’s real estate barometer for the second quarter.

Ross Moore, vice president and national director of research at Colliers International, said job creation, including ‘office using employment,' stayed strong during the second quarter, which supported the office market.

“This contributed to the continued health of the office market,” Moore said. “We anticipate further growth in the third quarter and for the balance of 2005. Just a few office markets project a slowdown, with the vast majority forecasting demand to meet or surpass current levels.”

Second quarter absorption totaled 30.5 million square compared to 19.2 million square feet during the same quarter last year and 18.7 million square feet during the first quarter, Colliers said. New construction totaled 12.0 million square feet during the second quarter–a modest increase from the 9.5 million square feet of new construction during the first quarter. Additionally, year-to-date completions totaled 24.1 million square feet–an 11.6 percent increase from the 21.6 million square feet year-to-date completions recorded during the same period in 2004.

While construction activity is up over 2004 levels the office market is still characterized by relatively little office development. Another 54.4 million square feet is under construction and expected to be completed in the next 18 months, which is consistent with construction activity for the past several quarters.

Moore said the continued strong absorption pushed the second quarter national vacancy rate down to 14.6 percent, compared to 15.1 percent during the first quarter and 15.9 percent for the same quarter last year. Markets with particularly impressive absorptions, in both downtown and suburban areas, included Southern Florida and Boston. Suburban office markets showed “remarkable strength” in many areas of California, the report said.

Consistent with lower vacancy, rents showed very modest increases during the quarter. Downtown rents increased 1.1 percent while suburban rents increased only 0.2 percent. Office rents are not expected to demonstrate any meaningful increase during the remainder of 2005, although quickly improving market fundamentals increasingly suggest higher occupancy costs in 2006.

According to Colliers, mid-town Manhattan led the U.S. in office health in the second quarter, with an absorption of 1.1 million square feet, followed by Houston (782,000); Boston (551,000); Denver (440,000); Philadelphia (334,000) and Fort Lauderdale, Fla. (172,000).

Among suburban markets, Orange County, Calif., showed the way with 2.4 million square feet in absorption, followed by suburban Phoenix (1.7 million); Los Angeles and Ventura Counties, Calif. (1.6 million); northern Virginia (1.3 million); suburban Philadelphia (1 million) and suburban Boston (907,000).

Meanwhile, the five largest German office markets saw a net absorption of 590,000 square meters (6.35 million square feet), a 26 percent increase over the first quarter, according to the IVG Real Estate Barometer. The report noted that vacancy rates fell in Düsseldorf and Berlin but stabilized in Frankfurt, Hamburg and Munich.

"A high percentage of rental turnovers in Germany are still being generated through the exchange of office space. A noticeable reduction in vacancy rates will only set in when new jobs are created and economic growth takes off. Investments in Germany should therefore be made as and when required and focus on tailor-made products in the right location," said Bernd Kottmann, a member of the board of management at IVG. "The figures show that the German real estate markets remain tenant markets, although this trend is starting to weaken."

Elsewhere in Europe, Barcelona (Spain), Paris and Prague (Czech Republic) saw increased absorption, while, Amsterdam, Brussels and Warsaw (Poland) experienced drops. Overall, Paris continued to lead European office markets in activity, followed by Frankfurt; Madrid; London; and Munich.

Average vacancy rates in Europe declined further to 9.5 percent from 9.9 percent in the first quarter. In Central Europe, the vacancy rate in major cities fell from 13.4 percent to 12.7 percent, while in Western Europe, vacancy rates fell from 9.5 percent to 9.1 percent. Paris, with a vacancy rate of just 5.3 percent, led all major European cities. Average office rents in Europe rose by 3.9 percent.
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CWCapital

CWCapital’s loan replaced the original acquisition financing and will provide funding for additional lease-up of the property, including a major recently-signed lease with a national credit tenant. Blackacre purchased Meridian Corporate Center in 2002. The 1.9 million square foot mixed-use property, situated on a 209-acre site, was developed between 1979 and 1984.  The property includes office, warehouse, and light manufacturing uses, and is nearly 90 percent leased to a variety of tenants including IBM, the original developer of the property. 

Meridian Corporate Center is the largest loan closed in the history of this program.  Kent Daiber, who runs CWCapital's Structured Finance Division, originated the $120 million loan. CWCapital closed its first bridge loan in November of 2003 and in the next 18 months closed nearly $1 billion in floating rate loans, including balance sheet whole loans and loans intended for securitization.

"Because a CWCapital affiliate will be the holder of the junior portion of the loan throughout its life and the loan will be serviced by CWCapital, Blackacre, the borrower, will benefit from our ongoing hands-on involvement as it completes the execution of its business plan for the property," said Michael Berman, president of CWCapital.
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The Workshop features valuable sessions, such as "Innovative Membership Strategies," "Legislative and Regulatory Highlights" and "Non-Dues Revenue Solutions." All aim to provide new ways to remedy old challenges. New to the program is a session, "Building for the Future," which addresses changing industry demographics and the need to stay relevant through diversification of members and employees. Also, MBA's public affairs staff presents "Managing Media Relations," using Home Mortgage Disclosure Act (HMDA) data and resulting reports as a test case. 

On October 21, working group breakouts are followed by an integrated recap session. On October 22, executives and managers have the opportunity to interact with their peers and hear from Doug Duncan, MBA's chief economist, who offers an economic forecast and a discussion on trends and their impact on the industry.

Renew acquaintances or make new contacts at the Welcoming Reception, and enjoy the Chairman-Elect Luncheon featuring Regina Lowrie, CMB, the first woman to chair MBA.

Click here to register online. If you have any questions contact Lisa Hazell at lhazell@mortgagebankers.org or (202) 557-2761.
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As job losses occur, modern mortgage history shows that the demand side of the supply and demand equation also fell in the housing market, according to Doug Duncan, chief economist at the Mortgage Bankers Association. In the early 1990s, following the end of the Cold War, significant job losses from defense cuts in Los Angeles caused housing prices to fall. In the 1980s, home prices fell as oil prices fell and people moved out of the oil patch states. Job losses from the NASDAQ meltdown, a slowdown in the stock market and dot-com fallout caused home prices to fall in some areas as well.

“Our observation is that it is always a collapse driven by employment that leads to house price declines,” Duncan said.

Coastal areas, including New York City, Northern New Jersey, Washington, D.C., Los Angeles and San Diego all show significant increases. However, these locations also have high employment figures at this time.

John Silvia, chief economist at Wachovia Corp., Charlotte, N.C., and former chief economist of the Senate Banking Committee, noted over the past 20 years, home price depreciations occurred in Charleston, S.C. following a shipyard closing. In Eugene, Ore ., home prices dropped in the early 1980s. “Most of the home price collapses in these different regions have a very explicit factor involved…It is employment," he said. "It’s a shock to the system that really impacts the local economy.” 

Silvia noted that different regions also reflect complex supply and demand side factors and public policy goals also contribute to rising home prices. “Much of it has to do with the coast but, again, it is supply and demand.”

In the early 1980s, mortgage interest rates were significantly higher than they are in 2005. The early 1990s also had interest rates relatively higher than today. Rising interest rates can be a factor for a potential housing bubble, but Duncan said the payment shock would affect roughly seven percent of borrowers. Those seven percent include households stretching to qualify for a mortgage in the market. 

Dean Baker, co-director of the Center for Economic and Policy Research, presented the ominous forecast of a recession more serious than in 2001, based on the burst of a housing bubble. Baker said the bubble will most likely end with higher interest rates and will hit a financial market that is not ready for a hit to a housing market with “more evenly distributed wealth” compared with 2001’s stock market bubble.

“Most likely, we see the fall off when we see the rise in interest rates,” Baker said. “When does that occur? [Fed chairman] Alan Greenspan has been talking about the conundrum. Probably, we have to not look at this central bank. We have to look at the Japanese and Chinese central banks when they decide to have our long term interest rates rise, they will rise and that is when we will likely see the collapse of the housing market.” 

Anthony Chan, senior economist at J.P. Morgan Asset Management, New York, said the mortgage market is more sensitive to interest rates than it has been in the past 50 years. However, mortgage rates need to rise to 7 percent to 7.5 percent before there is a “real significant pinch to the housing market boom.”

Chan noted concerns with interest only or negative amortization loans in California, loans with greater than 95 percent loan to value (LTV) and mortgage loans without downpayments. These products tell Chan that borrowers are beginning to stretch their funds. Chan said the pace of the housing market is “unsustainable” and home price appreciation can easily be cut in half in the next five years. “Not to say that this is a criticism but it is certainly a sign that we are stretching ourselves a bit,” Chan said.

Duncan noted, however, the past 15 years of mortgage application surveys when adjustable rate mortgages followed the refinance booms of 1993, 1998 and 2004. MBA believes the amount of ARMs will continue to drop as they have in the past few weeks, down from 35 percent to 30 percent of mortgage applications.

“We think fewer ARMs will continue as the Fed continues to raise the short end of the yield curve because households use adjustable rate mortgage products to manage affordability in a transition--from a low fixed rate environment to a high fixed rate environment--and we are now starting to see longer rates move up modestly,” Duncan said. “As the Fed raises the short end of the yield curve, that advantage [using ARM products] goes away and, as that advantage goes away, then you will start to see a general decline in affordability which will slow the pace of the housing sector modestly.”
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