MARKET RECAP

The markets were in full-holiday mode last week, meaning little was going on. But what was going on was encouraging – and no more encouraging than in the mortgage market. Indeed, applications continued to rise, reaching a new five-year high. A drop in borrowing costs, sparked in part by the Federal Reserve’s plan to buy mortgage-backed securities, continues to fuel activity.

If you'll remember back to November, the Fed announced a program to reduce the cost and increase the availability of credit for home buyers. Last week, the central bank selected four firms to manage a $500 billion purchase of mortgage-backed securities, to be completed by June. Only fixed-rate agency mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae are eligible for the program; nevertheless, the program is expected to drive more funds toward mortgage lending.

More funds, in turn, mean lower borrowing costs, and that's been the case in recent weeks. In fact, the prime 30-year fixed-rate mortgage is now hovering around 5.5% while the prime 15-year fixed rate mortgage continues to test 5%. Many parts of the country are availing themselves to mortgage rates unseen in the past five years. The really good news is that these rates are becoming available to a wider swath of the borrowing public.

What's more, the number of borrowers eligible for better rates could rise if recent employment trends hold. Initial jobless claims for the week ending December 13 fell a sharp 94,000, bringing the total seasonally adjusted amount of initial claims to 492,000, the U.S. Department of Labor reported. The drop in claims is the largest in 16 years. Some in the media were incredulous, but a Labor Department official told Reuters that “the numbers seemed unbelievable but the states certified they were correct.”

We shouldn't get too ahead of ourselves: The labor market continues to suffer from a troubled economy, but at least there are signs suggesting an improved employment situation heading into 2009.

The end of the year is usually marked with deep-thought retrospectives, but we might be better off simply glossing over 2008. We all know it has been a train-wreck of a year for housing, so there is no sense in reliving the obvious. At this point, it's more important to move on (without forgetting the lessons learned, of course).

We think 2009 will be a darn-sight better than 2008. The mortgage market has already improved drastically over the past few weeks: More money is available, and more money is available at very good rates. Much of the mortgage activity has been driven by refinances, to be sure, but let's not forget that purchase activity has increased as well. We think purchase activity will continue to increase as more borrowers take advantage of affordable home prices.

The key for housing at this point is price stabilization, and the trends on that front remain discouraging. But like we've said many times in these missives, prices can only fall so low. We can say, with some certitude, that we are definitely closer to a bottom than to a top, which is why we will be surprised if we're not writing about a stable, likely rising, housing market this time last year. After all, people can overlook bargains for only so long, so we expect the number of bargain hunters to swell considerably in 2009.