Mortgage Loan Programs for Credit Challenged Buyers

Every time I turn on the television or listen to the radio I hear another media talking head share with the public that banks are not making mortgage loans for buyers with credit scores less than 680, 720 or 740. Well I want to first set the record straight that this is not entirely true.

Now Let me make myself clear that “YES WE CAN” get you a mortgage if your credit score is lower than 680. There are conditions, but it is possible and I do it everyday for a lot of my clients.

Now that I set the record straight, let me explain this a little further.

First of all, it depends on where you go to get the home mortgage. Some of the bigger commercial banks and other financial institutions only sell a certain selection of mortgage products. Most of these mortgage products are all credit driven loan programs and are called conventional loans. So if you go to one of these banks or financial institutions for your home loan they might give you the same answer that you have been hearing on the radio or television. For example, I have a client that just came to me for help with a home loan. She originally went to her credit union to get the loan before speaking with me. This credit union told her that she had to put at least 5% down and she needed a credit score of at least 680 to secure the loan. Since she did not meet this criteria the credit union informed her that they could not provide the loan. What she was not told was that there are many alternative mortgage loan programs for buyers who do not have to put 5% down or require a 680 credit score.

So what are the mortgage loan options if your credit score is below 680?

The best mortgage programs for buyers who are credit challenged are ones in which the loan program is not entirely based on credit. Most government backed loan programs fit under these criteria such as FHA, VA and USDA loans. These programs are what I call “Guideline” loan programs. Under these types of loans you can expect less amounts required for down payment and credit scores as low as 580. Now the catch is you must meet the loan programs “Guideline”. Most of these programs require at least 2 years solid employment in the same line of work with the ability to prove that you can afford the payment. Having money saved up in your bank or retirement accounts always strengthen the file. Credit is used and most of these programs look at specific patterns on your credit. For example if 6 years ago you had a bankruptcy and have started to re-establish your credit, and your new history has been clean for the last 1-2 years, you will probably get approved on your credit profile. These types of loans are all reviewed by a human underwriter and sometimes things from your past can be explained with letters of explanation. Basically your file is reviewed on a case by case basis based on the program guidelines that are set up for each one of these government loans.

If you have further questions and would like to discuss your situation further, please feel free to just drop me an email or just call me.

The Housing and Urban Development better known as HUD has finally halted abusive practices by home-builders in which they would revoke huge buyer incentives for not using their preferred/affiliated mortgage company. When a colleague of mine Tom Burris shared this with me, I was jumping up and down in excitement. Over the last 2 years I have written 4 posts about this abusive behavior.

Are Builders Violating RESPA with Using In-House Lending?
Home-builders and Abusive Practices
Should I use the Home Builders Lender?
I decided to try and take some action against Home-builders and Abusive Practices

Effective Jan. 16, 2009 a new home builder can no longer use “disincentives” to steer their customers to their preferred mortgage company. In practice, builders have for years offered huge monetary incentives to steer customers to their preferred/affiliated lenders. Likewise, if the customer chose not to use the preferred/affiliated lender a huge “disincentive” was created in that the monetary incentives were taken away. HUD makes it clear that economic disincentives that are used to improperly influence a consumer’s choices are as problematic under RESPA as are incentives that are not true discounts. Under the new rules a consumer would be more likely to shop for a home and the loan and settlement service that is best for them, free from the influence of deceptive referral arrangements. RESPA Final Rule:

Now for the 1st time both the consumer and the mortgage provider will have a fair playing field with the home builder. This will allow the consumer to have more options when shopping for a home loan. It also puts the control back into the consumers hand. During the last 3 years, I saw a lot of consumers who ended up with a bad mortgage because that is what the builders preferred lender offered them. When the consumer questioned the loan, the builder threatened to pull their incentives for walking away from that loan. Some of these same folks lost their homes because that preferred builder lender put them into a wrong loan product such as an adjustable rate mortgage.

Today everyone is always wondering what is going on in both the mortgage and financial markets. I am great at breaking down the mortgage markets, but I decided to team up with Fuller Asset Managment to provide my readers information on the Financial Markets. This will be a new segment that will be posted every month. Follow the link for more information about Fuller Asset Managment.

As Lawrence Fuller states: “We are in the midst of a synchronized global recession due primarily to an unprecedented contraction in credit availability“. This is defentiley the case we are facing today. Basically in todays business market cash is king. Lawrence states in his article that we need smarter government not bigger government. Lawrence finishes by stating that we will start to see an improvement in the credit institutions over the next couple of months.

The Perfect Home Buyer Storm

photo credit: Christoph Schweiger

Normally I am not one to predict the market when it comes to mortgage rates, home values, good deals, tax incentives or tax rebates, but the writing on the wall is extremely clear to me that we have entered into what I want to phrase “The Perfect Home Buyer Storm”. I have not known a better time for first time home buyers or step-up home buyers to take advantage of all the benefits that are out there right now.

Here is my list of things that have transpired to make this “The Perfect Home Buyer Storm”:

1. Home Values have dropped to the lowest levels we have seen in the last 2-3 years. I saw a HUD Home in my local market priced at around $29,000.00 dollars. Now this does not mean that some areas might dip lower, but it’s like buying a good value stock at the bottom of the market.

2. The Tax Rebates that the government is offering for first time home buyers is incredible. (Home Buyer Tax Credits Worth $7,500.00). With $7,500.00 worth of tax credits, this should give you another reason to move on these great offers.

3. Good Deals on homes are plentiful. 2-3 years ago everyone had multiple bids out there to get into a home. Today all the choices, colors, locations, prices,
amenities and sizes are available. With so many pre-foreclosures, bank foreclosures and HUD homes of your choice, there is a home to fit any household budget.

4. Uncle Sam is still offering tax deductions on mortgage interest. I know this is an old reason to buy a home, but it still makes my list of ideal reasons.

5. Interest Rates are at it’s lowest point in the last 5 years. With interest rates so low, the cost to borrower is less, which equates to very affordable mortgage payments. There are a lot of people who are currently paying more for rent than the cost of a mortgage each month.

Right Now is the time to take action and get pre-approved. This is like seeing Halley’s Comet . This is a once in a lifetime home buyer storm that might never come back this great.

Home Buyer Tax Credits Worth $7,500.00

If you are in the market to purchase a home for the first time in your life and want to take advantage of the down slide in the housing market, the government has just given you 7,500 more reasons to sweeten the deal.

On July 30, 2008 the President of the United States Signed into effect the Housing and Economic Recovery Act of 2008 or better known as HR-3221. This law basically created a special tax credit for first time home buyers to purchase homes and take advantage of $7,500.00 worth of tax incentives if a home is purchased between April 9, 2008 and July 1, 2009.

Let me share some important details about this program further. First of all to be eligible for the tax credit you must meet the following guidelines:

The tax credit is only available for first time homebuyers as defined by the government as being a buyer who has not owned a home in the last 3 years.

You must buy and close on the new home before April 9, 2009. If you buy after this date, the tax credit is no longer offered. So make sure you buy during this time frame.

The credit is available to single person taxpayer with an adjusted gross income of $75,000.00 or less or married jointly taxpayers with an adjusted gross income of $150,000 or less to get the full credit. Some Credits are available for those making more than the limits listed here.

(Please seek information from a professional tax preparer or certified tax preparer. I am not a tax professional and cannot give you tax advice.)

Now please be aware that anytime the government offers something for free, there is always some type of catch. The catch in this case is that the tax credit is not a free gift. This tax credit must be paid back to the government over 15 years at $500.00 a year starting with the following tax return after you received the tax credit. For example if you take the tax credit this year in 2008, then you start repaying the $500.00 a year on your 2010 return.

Late positioning for the month spurred buying in both stocks and Treasuries today but light volumes in abbreviated sessions may have exaggerated price moves. Some safety flows favored bonds as news of terrorist activity in India continues to come in. Events that may have an impact on the markets often motivate investors to seek areas of less risk before a weekend when they cannot react to the news. 

10 Year Note Yield

But the safety shift did not extinguish this week’s positive sentiment in the stock market as traders have been picking up what they perceive as bargains.In late trading, the 10-Year Treasury Note was up by 16/32, lowering its yield by 6 basis points to 2.92%; the Dow was up by 102.43 points to 8,829.04; and the Nasdaq was up by 3.47 points to 1,535.57.

Despite bleak economic news released this week and expectations of more to come, stocks have had a good week. Announcements this week of new government efforts to facilitate credit flows and the selection of economic officials for the next administration have kindled some optimism and traders began to perceive the stock market as being oversold. But analysts note that the bounce is a test of the recent downtrend and it could trigger new waves of selling as more bearish news is released.
Oil futures rose today with a barrel of light, sweet crude for January delivery up by $1.08 on the New York Mercantile Exchange to settle at $55.52. For the week, the price has risen by $5.59 and today’s close was the highest for the front-month contract in two weeks. However, the price was down for the month by $12.29.

By the end today’s stock trading, the Dow had gained 1.17%; the S&P 500, 0.96%; and the Nasdaq, 0.32%. All three made good gains for the week with the Dow rising by 9.73%; the S&P 500, 12.03%; and the Nasdaq, 10.92%. But they all declined for the month: the Dow lost 5.32%, the S&P 500 lost 7.48%, and the Nasdaq lost 10.70%.

The yield of the benchmark 10-Year Note fell by 28 basis points this week (yield moves inversely to price). For the month, the yield has fallen by 104 basis points and currently stands at an historically low level.

Next week brings the early-month heavyweight economic indicators: the national index on the manufacturing sector and the employment report. The manufacturing data from the Institute for Supply Management (ISM) comes out on Monday. In its report for October, the ISM said its purchasing managers index came in at 38.9. Any reading below 50.0 indicates a general contraction in activity relative to the preceding month and October’s reading was the lowest since September of 1982. Analysts had predicted an index of about 41.5 following September’s 43.5. In the last twelve month’s, the index has registered 50.0 or above only four times and the strongest of those readings was 50.7.

The news release included the following explanatory comment by Norbert J. Ore, chair of the ISM, “The PMI indicates a significantly faster rate of decline in manufacturing when comparing October to September. It appears that manufacturing is experiencing significant demand destruction as a result of recent events, with members indicating challenges associated with the financial crisis, interruptions from the Gulf hurricane, and the lagging impact from higher oil prices.”
A modest bright spot was a tame inflation indicator in latest data. The prices index came in at 37.0. This was the first contraction reading since December of 2006 and the lowest reading since December of 2001.

Also out on Monday is the report on construction spending for October. In September’s report, the Commerce Department said that the seasonally adjusted, annualized pace of spending fell by 0.3%. The decline was smaller than the 0.7% or 0.8% that analysts were predicting and August’s originally reported flat reading (0.0%) was revised to an increase of 0.3%. However, July’s previously reported decline of 1.4% (already revised from an originally reported drop of 0.6%) was once again revised to a decline of 2.4% — the largest in over two years.

The housing arena remained a weak spot. The last report said the pace declined in the residential sector by 1.3%. August’s originally reported increase of 0.3% was revised up to a gain of 1.9%, the largest jump since December of 2005. But July’s previously reported decline of 3.7% was revised to a steeper drop of 5.9%. Though July’s spending pace was lower, September’s was the second lowest since December of 2000.

On Wednesday, the revised report on productivity for the third quarter will be released. In the preliminary report released earlier this month, the Labor Department said that, according to preliminary data, the seasonally adjusted level of nonfarm business productivity (average output per worker per hour) grew at an annualized rate of 1.1% in the third quarter of the year relative to the second. This was the slowest pace of the year so far and the previously reported increase of 4.3% in the second quarter was revised to 3.6%.

A deceleration had been anticipated, however, because of the contraction reported in the advance report on gross domestic product. Also not unexpectedly, the lower productivity growth increased unit labor costs (ULC: average cost per unit of output). According to the initial calculations, they grew by 3.6% in the third quarter following a 0.1% decline in the second (revised from the previously reported decline of 0.5%).

Wednesday also brings the ISM index for the services sector of the economy. In October, the index came in at 44.4, down sharply from September’s reading of 50.2. As is the case with the manufacturing index, any reading of the services index under 50.0 reflects a general contraction in activity relative to the preceding month.

The current index, the NMI or Non-Manufacturing Index is new — first published last January. It is a composite of four seasonally adjusted indices: business activity, new orders, employment, and supplier deliveries. October’s reading is the lowest in the data series so far.
Before the NMI was instituted, the business activities index was the headline indicator on the services sector, but it is derived from a single question in the survey of business purchasing managers. The business activities index for October came in at 44.2, down from September’s 52.1. It was the lowest reading since last January’s 41.9 and the second lowest since October of 2001 when it came in at 40.5.

On Wednesday afternoon, the Federal Reserve will release its latest edition of the Beige Book, an anecdotal summary of economic conditions in the twelve Fed regions. The report is used as one of the background resources in the monetary policy committee’s deliberations. The next policy meeting is slated for the 15th and 16th of December.

The Beige Book rarely has much impact on the markets since previously released indicators have already sketched out the economic landscape. But any rhetorical variant, a particular focus or emphasis, could be perceived as a signal of Fed intentions and have some influence on traders. Currently, Fed watchers are anticipating another cut in the committee’s target for the fed funds rate (overnight borrowing rate between banks) and the discount rate (rate charged for loans directly from the Fed).

Thursday brings the weekly report on jobless claims and it will get added attention as it comes out a day before the employment report for November. The data collection periods for the two reports do not coincide but the trend in claims provides insight on the state of the labor market.
In Wednesday’s report, the Labor Department reported that the seasonally adjusted level of initial claims for state unemployment benefits fell last week by 14,000 to 529,000. The decline was not unexpected following two week’s of increases totaling 59,000.
In any case, readings over 400,000 are considered a sign that layoffs are outpacing hiring and the latest claims level was the second highest since July of 1992.

The four-week moving average, which smoothes out some short-term volatility, rose by 11,000 to 518,000 — the highest reading since January of 1983. For the forty-seven weeks of the year so far, the average initial claims reading has been 406,340. For the same period last year it was 319,085.
The report said that continuing claims fell by 54,000 to 3.962 million in the week ending November 15 (continuing claims must be at least a week old). This was the second highest reading since January of 1983. The four-week average rose by 60,250 to 3.929 million — the highest reading since January of 1983. For the first forty-six weeks of the year, the average continuing claims reading has been 3,203,413. For the same period last year, the average was 2,535,957.

Also on Thursday, the Commerce Department will release its report on factory orders for October. September’s report said that the seasonally adjusted level of new orders fell that month by 2.5%. The decline was stronger than the 1.0% that analysts had predicted. August’s originally reported decline of 4.0% was also revised to a drop of 4.3%, the largest decline since October of 2006.
All of the key sub-categories also saw sizeable declines. The order level outside the large but volatile category of transportation fell by 3.7% after a 3.6% decline in August. September’s drop was the largest in the history of the data series going back to 1992. Within the transportation sector, orders rose by 6.5%, the biggest increase in seven months.

Another closely watched category is that of orders outside the defense sector since those in the sector are not governed by standard market forces. Ex-defense orders fell by 3.3% following a 4.5% decline in August. Defense orders rose by 22.8%, the biggest increase since last December.
Orders for capital goods outside of the defense sector and excluding commercial aircraft are seen as a gauge of core business demand. The category saw a decline of 1.5% in September following a decline of 2.3% in August.

For October, recent predictions have called for a decline in the factory orders level of 2.7%. But Wednesday’s report on durable goods orders, which make up slightly more than half of all factory orders, indicated a drop 6.2%. This suggests that the overall order rate may be a larger decline than previously forecast.

On Friday, the often market-moving employment report comes out. In the report for October, the Labor Department said the seasonally adjusted level of nonfarm payrolls declined that month by 240,000. This was a larger decline than the 200,000 that forecasters had predicted. In addition, September’s originally reported decline of 159,000 was revised to a drop of 284,000, the biggest decline since November of 2001. August’s previously reported decline of 73,000 was revised to a drop of 127,000.

The report indicated that job losses were broad-based; losses were posted in both the goods producing and services sector. Besides the larger than expected loss in payrolls, the report said that the unemployment rate — the percentage of the active workforce without jobs — jumped from 6.1% in September to 6.5% in October. This was the highest reading since March of 1994.
For November, payrolls are expected to have fallen by between 250,000 and 300,000. The unemployment rate is expected to have risen to 6.8%. This would be the highest rate since October of 1993.

10:30 AM EST : There are no economic releases today and many traders are on the sidelines, extending the Thanksgiving Day holiday through the weekend. But this is the last trading day of the month, affording portfolio managers with their last opportunity to readjust their holdings before closing out their books for November.

The markets have been exceptionally volatile since August and they are especially vulnerable when trading volumes are low due to the loss of liquidity. With this in mind, many traders will attempt to take a conservative approach today, not wanting to rock the boat. That is evident in early action as both bonds and stocks are hovering in tight channels around unchanged levels . . . .

Source: LionMTS

Step 1: Do a monthly budget: Most of us have no idea how much money we can afford in a payment. By doing a monthly budget, you can see how much money you are willing to spend each month on a mortgage payment and stick to your instincts. One of the first questions I ask is “How much are you comfortable in spending on a payment”. Remember, after the paperwork is signed for the loan, your lender is not going to make that payment for you. You will want to make sure you can afford that payment and feel comfortable with your decision.

Step 2: Seek out a mortgage expert for your unique situation: If you’re buying your first home, seek out a lender who specializes with 1st time home-buyers. If you’re buying an investment property, seek out a mortgage lender who can help you maximize your investment property.

Step 3: Choose the lender based on professional service, not on the cheapest rate and fee structure: The old adage “you get what you pay for” is very true in the mortgage business. The best mortgage professionals will come highly recommended and want a little higher premium for their services. This does not mean that they cannot offer you great mortgage interest rates and closing fees, it just means that they do not work for free. Good mortgage professionals will be worth their price in gold. Your goal at the end of the day is to choose the correct mortgage product for your unique situation. The last thing you want to do is spend more money later having to refinance your loan because the wrong product was chosen upfront. Those costs add up over time.

Step 4: Stay away from Mortgage Gimmicks: Again, “if it sounds too good to be true”, this is probably a mortgage gimmick. That 1%, 2% mortgage rates are just that, they are a gimmick. If you heard on the news last night that rates are around 6.5% and someone advertises a 4% rate, then it’s probably a mortgage gimmick. Remember all lenders basically sell the same products and go to the same sources to get the money for mortgage loans. There is no such thing as a “Free” loan. We hear mortgage lenders advertise all the time no closing costs. This is a mortgage gimmick. All they are doing is charging you a higher rate and getting paid by the bank for selling you a more expensive mortgage loan. If a mortgage company is running a lot of slick commercials on TV or radio, be aware that there is a cost built into your loan to pay for those marketing costs. Just because they advertise low rates, does not mean you will get one.

Step 5: Get a personal referral for 2-3 mortgage lenders: Hear is one of the easiest ways to end up working with a trustworthy mortgage lender. Write a list of 4-5 people you personally know in your life who have always been great with their money and ask them if they know of a great mortgage lender. People who are good with their money seek out top notch mortgage professionals.

Step 6: Interview the mortgage lenders and ask a lot of questions: Let the mortgage company know upfront that you are interviewing them for their services. Ask them for personal references. Ask them how long they been providing their services, ask them how much they like their job. These 2 questions will tell you a lot about their character. Ask them about the areas they specialize in. Ask them how they communicate with their clients and ask them about value added services. Ask them about the costs of doing the loan, and which programs would be best for you. Then tell them your unique situation.

Step 7: Take action choose the right lender: By this time, you have decided which lender will be best for you. Let that person know that you would like to work with them to get approved for a home loan. Let them take your loan application and work on getting that mortgage pre-approval.

On March 6, 2008 HUD announced a temporary FHA loan limit increase in counties across the United States. The Economic Stimulus Act of 2008 permitted FHA to insurance loans up to 125% of the area median house price.  These loan limits now run out on December 31, 2008.  After that date all FHA loan limits will revert back to the county limits based on median home price.  The impact on the homebuyer community is huge.  In some counties this could change the maximum loan limit by hundreds of thousands of dollars.  If you are looking to buy a home using FHA, please call me now to see if this is going to impact your new FHA mortgage loan. 

Attention Police Officers, Firefighters, Teachers and EMT’s. If you are in the market for a home you need to be aware of this specialized FHA loan program through HUD called the Good Neighbor Next Door Program. I am helping a couple of teachers right now with this loan and the outcome has been fantastic. Let me explain the mortgage loan details a little bit further. Basically if eligible for the program you can take advantage of an incentive to get into the home at a discount of 50% off the list price of the home. In return for the discount you commit to HUD that you will live in the home for 3 years as your primary residence.

Also you can use this program in conjunction with a 203K loan. Cherry Creek Mortgage Company has been doing these loans in conjunction with each other.

How the Program Works:

First of all the buyer must purchase the HUD home in a revitalization area. I always recommend getting your Real Estate Agent involved upfront and letting them know that you want to pursue these homes. Your agent can be a great guide with the HUD Homes available in your revitalization areas. You will also want to get your FHA mortgage pre-approved upfront before starting to look at these homes.

HUD does require that you sign a silent second for 50% of the value until you have fulfilled your 3 year occupancy requirement.

For further information, please feel free to contact me.

With the exception of the long bond, intermediate and long-dated Treasuries are up this morning, though off earlier highs. Stock prices are mixed to modestly higher in choppy trading. Today’s economic news was mixed but the major release was much more bearish than observers were expecting.

The Institute for Supply Management (ISM) said its index on the nation’s manufacturing sector came in at 38.9 for October. Any reading below 50.0 indicates a general contraction in activity relative to the preceding month and October’s reading was the lowest since September of 1982. Analysts had predicted an index of about 41.5 following September’s 43.5. In the last twelve month’s, the index has registered 50.0 or above only four times and the strongest of those readings was 50.7.

The news release includes the following explanatory comment by Norbert J. Ore, chair of the ISM, “The PMI indicates a significantly faster rate of decline in manufacturing when comparing October to September. It appears that manufacturing is experiencing significant demand destruction as a result of recent events, with members indicating challenges associated with the financial crisis, interruptions from the Gulf hurricane, and the lagging impact from higher oil prices.”

A modest bright spot was a tame inflation indicator in latest data. The prices index came in at 37.0. This was the first contraction reading since December of 2006 and the lowest reading since December of 2001.

The headline number of the other economic release of the day was more bullish than expected but revisions to past data are offering some counterbalance. The Commerce Department said that the seasonally adjusted, annualized pace of construction spending fell by 0.3% in September. The decline was smaller than the 0.7% or 0.8% that analysts were predicting and August’s originally reported flat reading (0.0%) was revised to an increase of 0.3%. However, July’s previously reported decline of 1.4% (already revised from an originally reported drop of 0.6%) was once again revised to a decline of 2.4% — the largest in over two years.

The housing arena remained a weak spot. The report said the pace declined in the residential sector by 1.3%. August’s originally reported increase of 0.3% was revised up to a gain of 1.9%, the largest jump since December of 2005. But July’s previously reported decline of 3.7% was revised to a steeper drop of 5.9%. Though July’s spending pace was lower, September’s was the second lowest since December of 2000.

This week’s economic calendar contains a couple of heavyweight releases. Today’s ISM Index was one and the other is Friday’s employment report for last month.

Tomorrow, the report on factory orders for September will be released. The trend in orders provides some insight regarding demand levels and upcoming production activity. In the report for August, the Commerce Department said that the seasonally adjusted level of new orders fell by 4.0%, the largest decline since October of 2006. In addition, July’s originally reported increase of 1.3% was revised to a gain of just 0.7%.

A particularly volatile category is transportation and the order level fell there by 9.1% in August. But even excluding the category, orders were down by 3.3%, the biggest drop since September of 2001. Another closely watched category is ex-defense orders since defense demands are not governed by standard market forces. Defense orders rose in August by 3.6%, leaving ex-defense orders down by 4.2%, the biggest drop in a year.

The report said that durable goods orders fell by 4.8%, the largest decline in twenty months. Orders for non-durable items declined by 3.3%, the biggest drop in two years.

Another key category is nondefense capital goods minus aircraft — seen as a gauge of core business demand. The order level there was down by 2.4% in August, the biggest decline in twenty months.

According to last Wednesday’s report on durable goods orders for September, they rose by 0.8% but August’s previously reported decline of 4.8% was revised to a deeper drop of 5.5%, making it the biggest contraction since October of 2006. Moreover, declines were posted in the ex-transportation, ex-defense, and ex-defense minus aircraft categories.

Despite the modest increase in durable orders, analysts are calling for a decline in overall factory orders of between 0.7% and 1.0%.

On Wednesday, the ISM will release its index for the non-manufacturing or services sector of the economy. The current services index, the NMI or Non-Manufacturing Index is new — first published last January. It is a composite of four seasonally adjusted indices: business activity, new orders, employment, and supplier deliveries. In September, the index came in at 50.2, down from August’s 50.6. Like the manufacturing index, any reading over 50.0 indicates a general expansion for the month.

The highest reading this year is only 52.0 and the average has been 49.5. This suggests that the sector is basically idling.

Before the NMI was instituted, the business activities index was the headline indicator on the services sector, but it is derived from a single question in the survey of business purchasing managers. The business activities index for September came in at 52.1, up from August’s 51.6 and the highest reading since May.

The report contained another encouraging inflation indicator. The prices index came in at 70.0. While still reflecting strong increases, it was down from August’s 72.9 and was the lowest reading since February.

For October, the consensus forecast range is between 48.5 and 49.0.

On Thursday, the jobless claims report will highlight the employment sector. In last Thursday’s report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits was unchanged in the week ending October 25 at 479,000. The lull followed large swings that saw the level increase by 16,000 in the week ending October 18 following two weeks of declines totaling 36,000 following three weeks of increases totaling 54,000. The four-week moving average, which smoothes out some of the short-term volatility, declined by 5,000 to 475,500.

The claims level remains elevated. Any reading over 400,000 suggests that layoffs are outpacing hiring. Despite the tame readings in the last two weeks, the trend has been up. For the first forty-three weeks of the year so far, the average claims reading has been 395,814. For the same period last year, the average was 317,512.

The report said that continuing claims fell by 12,000 to 3.715 million in the week ending October 18 (continuing claims must be at least a week old). The decline was the first in six weeks. The four-week average rose by 28,000 to 3,709,500, the highest reading since May of 2003. For the first forty-two weeks of the year so far, the average continuing claims reading has been 3,134,167. For the same period last year, the average was 2,529,476.

The claims data was collected after the surveys for October’s employment report were conducted so the two reports have no direct correlation. But the claims report will act as a reminder that the monthly report is looming. Since forecast misses in the monthly jobs data have produced substantial reactions in the markets, some traders may be encouraged to take defensive positions. However, this may be more prevalent in the stock market as the outlook for the labor market is not bright in a contracting economy.

Also on Thursday is the preliminary report on productivity for the third quarter. In the final report for the second quarter, the Labor Department said that nonfarm business productivity (average output per worker per hour) rose at a 4.3% annualized rate. This was up from a 2.6% rate in the first quarter.

Because the advance report on gross domestic product indicated a 0.3% contraction in the third quarter, productivity is also expected to have been weaker. Analysts are predicting an increase of about 1.0%. This would be the weakest growth in three quarters and the growth may be chiefly attributed to the reductions in employment rolls.

On Friday, the major release of the day is the employment report. In September’s report, the Labor Department said that the seasonally adjusted level of nonfarm payrolls fell that month by 159,000. Not only was this a much larger decline than recent forecasts of 90,000 to 100,000, but it was the largest since March of 2003.

The weakness was broad-based, hitting both the goods producing and services sectors. While the payroll figure was weaker than anticipated, the unemployment rate, as expected, came in at 6.1%, matching August’s reading. However, it was still the highest since September of 2003. The unemployment rate is the percentage of those in the active workforce without jobs.

Analysts feel that October’s report will be bleak. They are predicting that payrolls fell by between 175,000 and 185,000. They are also predicting that the unemployment rate rose to 6.3%. If the employment rate prediction is true, it would be the highest since June of 2003.

A couple of minor releases also are slated for Friday. The report on pending home sales will provide some insight on upcoming sales activity. The report for August surprised observers by showing a substantial pickup in contract activity. The National Association of Realtors reported that its index of sales rose by 7.4%. The rise was corroborated in the latest report on existing home sales which also showed a surprising rise in September. Though the sector continues to struggle, the latest sales data suggests that falling home prices are generating increased buying interest.

Another second-tier release on Friday is the report on wholesale inventories for September. In August’s report, the Commerce Department said that the seasonally adjusted level of inventories rose by 0.8%. Though twice as large as analysts had predicted, latest gain was the weakest in five months.

Rising inventories can be seen as bullish if they are perceived as resulting from preparation for increased demand. But August’s report said that the level of sales fell in August by 1.0%. This was the largest decline since January of 2007 and July’s previously reported decline of 0.3% was revised to a decline of 0.8%.

The monthly changes resulted in an inventory-to-sales (I/S) ratio for August of 1.10 and July’s previously reported 1.07 ratio was revised up to 1.08. The I/S ratio is the value of stocks on hand at the end of a month divided by the value of sales for the month. It indicates how many months it would take to entirely deplete existing inventory at the prevailing sales pace. Rising turnover times mean increasing pressure to replace supplies. The ratio is still low by historical standards, however. June’s 1.06 reading was a record low.

For September, the inventory level is expected to make another small increase but the sale level is expected to have declined again.

The wholesale inventory data is dated. The report is also considered second-tier since it provides only one piece of the inventories picture. A more comprehensive report — including the manufacturing, wholesale, and retail sectors — will be released on the 14th.