The ISM Index; Current Bank Lending

Each day the Research staff takes a look at recently released economic indicators, addressing what these indicators mean for REALTORS® and their clients. Today’s update highlights the ISM Index and current bank lending practices.

• Banks have said that they will fill the void in providing jumbo mortgages once the government backing goes away. With conforming loan limits declining to lower levels starting this month in over 600 counties, banks evidently are not filling the void.
• More consumers are now pushed to take out a jumbo loan and not a FHA mortgage, and consumers are facing much higher interest rates. Loans that stay within the new lower loan limits are being offered at 4.0% (to high credit score applicants). The loans that are now classified as jumbo are being offered at 4.8% (to high credit score applicants). Naturally, higher interest rates will deter some potential home buyers who can help revive the housing market and the broader economy.
• If banks are not lending on jumbo, what are they doing? Lending it to small businesses or to fund venture capitalists? Apparently by the size of the bank cash reserve holdings, the money not lent out on jumbo loans is just sitting in the bank or parked at the Federal Reserve. This is no way to help U.S. consumers or the economy. Congress and the Administration were dead wrong in allowing loan limits to fall at this point in the housing and economic cycle and thereby pushing more hard-working Americans to face non-appetizing jumbo interest rates.
• Separately on economic news, both the manufacturing and construction sectors pumped out more activity in September. The ISM index, which measures manufacturing activity, rose to 51.6 from 50.6 in the prior month. An index better than 50 implies expansion, while below 50 implies contraction. Though overall activity improved, new orders came in at 49.6, implying a non-robust recovery.
• Total construction spending inched higher by 0.9 percent in August from one year ago. Private sector construction improved by 5.6 percent, while public construction fell 6.3 percent. The big drivers for improvement came from multifamily construction and private commercial real estate. Though an improvement of late recently, the gain is coming after a major pull back in the past 5 years. The construction data is counted only after a project is completed. The ongoing construction activity with cranes and tractors are not counted in this figure. Today’s data is hinting that the worst in construction employment is likely over.